EC4NR AGRICULTURE POLICY NOTE #10 Estonia Agricultural and Forestry Policy Update Natural Resources Management Division Country Department IV Europe and Central Asia Region February 26, 1997 CURRENCY EQUIVALENTS Currency Unit = Estonian Kroon (EEK) DM 1 = 8 EK (January 1997) ESTONIA AGRICULTURAL DATA Agriculture in GDP 1995 8% Decline of overall agriculture Total Population 1.6 million Food and agriculture in active labor production 1995/86 47% Rural Population 28% (1995) 12.1% Decline of livestock sector Food and agriculture in export 1995/86 52% Total Area 4.52 mill. ha. (1995) 16% Share of livestock (1995) 55% Agriculture area: 1.46 mill. ha. Forestry share in exports (1995) 16% Share of independent family farms Food and Agriculture in imports in total cultivated land (1995) 29% Arable land 77.5% (1995) 14% Share of small subsidiary plots in Drained 66% Traditionally net exporter of total cultivated land (1995) 23% Orchards 1.0% processed foods: eggs, butter, Grassland 21.5% cheese and flax, in 1995 Estonia Forested 44.7% became a net importer. FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES ha Hectare Kg Kilogram Kwh Kilowatt hour ABBREVIATIONS ARLCF Agriculture and Rural Life Credit Fund CAP Common Agricultural Policy CASE Consumer Subsidy Equivalent CEFTA Central European Free Trade Association EFTA European Free Trade Association ENLB Estonian National Land Board FAO Food and Agriculture Organization FSU Former Soviet Union MOA Ministry of Agriculture OECD Organization of Economic Cooperation and Development PSE Producer Subsidy Equivalent WTO World Trade Organization CONTENTS Executive Sum m ary ............................................................ i 1. Pre-IndependenceAgriculture ..............................................1 2. Economic and Sector Reforms in Aggregate: Progress and Perspectives ............ 1 3. Sectoral Performance in 995-1996 .........................................4 4. Land Reform and FarmRestructuring ........................................7 5. Privatization of Agroprocessing, Retail Trade, and Services for Agriculture ......... 11 6. Reforms in the Forestry Sector ............................................13 7. Maintaining a Liberal Macro Environment for Food and Agriculture .............. 14 8. Government Support Programs and Investments .............................. 16 9. Improved Financing for Food andAgriculture ................................19 10. Creation of Institutions Required by a Reformed Food and Agriculture Sector ....... 20 11. Rural Environmental Situation ............................................ 12. Rural Living Standards ..................................................22 13. W orld Bank Operations ..................................................23 The Estonia Food and Agriculture Sector Review (Report #13316-EE) provided a status report on the food and agricultural sector and an assessment of the ongoing sectoral reforms through late 1994 when the final version of the report was completed. This note covers agriculture policy developments in Estonia since then and gives a brief assessment of the sector performance in 1995-96. In this report the agricultural and forestry policy perspectives, and the sector in general, are analyzed in a broader rural development framework. This note was prepared by Csaba Csaki, supported by Florian Grohs, Alan Zuschlag, Nathalie Olsen, and Phyllis Harrison. Mssrs. James Harrison and Carlos Cavalcanti provided valuable comments. The recent OECD study on Estonian agriculture and various working notes prepared by the FAO Agricultural Strategy Team were used as background material and Messrs. H. Tullus and M.Tamm at Tartu Agriculture University acted as local consultants for this report. Boxes: Box I Process of Land Restitution ....................................8 Box 2 Contribution of Various Farming Categories to Ag. Production (1995) 10 Box3 Rural Povertyin 995 .......................................22 Figures: Figure 1 Gross Agricultural Output .....................................4 Figure 2 Foreign Trade Balance, 1992-1996 .............. ................ 5 Figure 3 Exports of Food and Agricultural Products by Trading Partner ........ 6 Figure 4 Imports of Food and Agricultural Products by Trading Partner ........ 6 Figure 5 Land Distribution at the End of 1995 ............. ............... 9 Figure 6 Budget of Ministry of Agriculture - Total Expenditures ............. 17 Figure 7 Budget of Ministry of Agriculture - Public Investments ............. 18 Appendix Policy Matrix Statistical Tables: Table 1 Macroeconomic Indicators, 1992-1995 Table 2 Gross Agricultural Output, 1986-96 Table 3 Per Capita Consumption of Selected Food Products, 1986-95 Table 4 Foreign Trade in Estonia, 1992-96 Table 5 Crop Production in Estonia Table 6 Yields of Main Agricultural Products in Estonia, 1986-95 Table 7 Livestock Sector in Estonia Table 8 Estonian Woodlands Resources and Dominant Tree Species in 1996 Table 9 Annual Maximum Volume of Wood Utilization Table 10 List of Laws with Special Relevance to the Transformation of Agriculture Table 11 Contribution of Different Types of Farms to Agricultural Production, 1995 Table 12 Development of Family Farming in Estonia, 1991-96 Table 13 Size of Private Farms, January 1, 1996 Table 14 Distribution of Forest Land by Ownership Category (1995) Table 15 Average Retail Trade Prices of Selected Products, October 1996 Table 16 Total Budgetary Expenditures Associated with Agro-Food Policies Table 17 Area of Goverment of the Ministry of Agriculture - Costs in 1995-97 Table 18 The Investment Plan EXECUTIVE SUMMARY 1. After independence Estonia implemented a rather ambitious and unique program of liberalization and macroeconomic stabilization which brought significant achievements and international acknowledgment. Reform in the food and agriculture sector has also progressed. Achievements in reforming food and agriculture however, are lagging behind those reforms in other sectors of the economy and the macro-economic environment as a whole. The incentive framework for agriculture is almost distortion-free. The liberal environment, however, has not led to growth and recovery in the food and agriculture sector. 2. A liberal policy environment in general, and reduced real prices for agriculture, are supposed to create incentives to make farming more efficient and competitive. Unfortunately in Estonia, the changes of relative prices were combined with slow progress in sectoral reforms. The most critical areas are: a) the land reform and farm restructuring, which is progressing rather slowly due to complicated restitution processes; and b) privatization of agro-processing where the method of privatization has not resulted in transparent ownership at most of the agroprocessing enterprises. As a result, with the exception of a few commercial farms operating on the best land, the bulk of the sector is not able to produce competitively under the given conditions and the sector is in decline and stagnation. The new urban Estonia shows signs of recovery, while rural households are lagging behind. 3. For Estonia, which is a small, open economy, the liberal and non-distortive trade and macro policies have overwhelming advantages. The most appropriate way of preparing the sector for EU accession is also to develop an agricultural system which is competitive on the open market. It is essential therefore, that the policy response to rural social problems and demands of the agricultural sector for more support take an appropriate form and not a form that creates new sources of inefficiencies and distortions in the economy. 4. Therefore, the completion of the remaining tasks in transition need to be treated as the most important short-term priorities. These include: a) acceleration of the completion of land reform, including settlement of land ownership issues, acceleration of privatization of unclaimed state-owned land, the accelerated progress in land titling, and improving land legislation (see paras. 18 - 22); b) facilitate the creation of more transparent ownership structure in agroprocessing conducive to increased participation of foreign investors together with the increased use of bankruptcy procedures to speed up restructuring, downsizing, and modernization (see paras. 23 - 28); c) further progress in institutional reforms and strengthening rural financing and advisory services (see paras. 45 - 46); and d) funding and appropriate institutional arrangements to provide a cost effective and 11 equitable social environment (see paras. 54 - 56). 5. Maintaining a liberal macro environment in the sector has overwhelming short-term and long-term advantages. It is also the most beneficial policy in regard to EU accession. Concurrently, an adequate response to growing pressures demanding an adjustment in the macro environment to promote agricultural growth and the recovery of the rural economy, needs to be found. In addition to the completion of the sectoral transition, the provision of non-distortive budgetary supports, such as the provision of public goods, and improvements in rural infrastructure would enhance agricultural and rural growth while maintaining an overall, undistorted macro environment (see paras. 54 - 56). 6. The attached policy matrix provides an overview of the current status of reforms in areas critical to Estonian agriculture and also includes proposals for further actions. Estonia Agricultural and Forestry Policy Update Pre-Independence Agriculture 1. In the pre-Soviet period, agriculture was one of the most significant components of the Estonian economy. During the Soviet era Estonia went through a rapid period of industrialization; the share of food and agriculture in the GDP declining to 20% in the late 1980s. Pre-independence agriculture in Estonia was dominated by dairy and livestock production. Central planners assigned Estonia the role of specialized livestock producer for the Soviet Union. The country supplied dairy products, pork, and beef to neighboring republics, which in turn, provided most of the grain and other needed inputs. Animal products accounted for more than two thirds of total agricultural production. During this period, Estonian agriculture performed well when compared with other Soviet republics. The yields and economic efficiency of livestock production were the best inside the Soviet Union and were comparable to many countries in Central and Eastern Europe. Although Estonian agriculture had many strengths, it was constrained by the well-known shortcomings of socialist agriculture. Quantity was the major objective, while quality and efficiency played only a secondary role. The whole sector required an expensive system of subsidies and the secure markets inside the FSU resulted in little attention being paid to quality improvements. Processing industry and incentives to stimulate the improvement of technology and product development, as required by competitive market economies, did not exist. Economic and Sector Reforms in Aggregate: Progress and Perspectives 2. After independence Estonia implemented a rather ambitious and unique program of liberalization and macroeconomic stabilization which brought significant achievements and international acknowledgment. The use of a currency board to maintain a fixed exchange rate following a substantial devaluation in 1992, the balancing of the budget, the increase in foreign currency reserves, and the establishment of a completely convertible currency, as well as the complete liberalization of external trade policies, capital transactions, and internal markets, represent the major features of the Estonian macroeconomic reforms. The significant reduction of inflation from initially very high levels, the large inflow of foreign direct investments, the expansion of service sectors and the resumption of overall economic growth are the most important indicators of the success (Table 1). 3. Reform in the food and agriculture sector has also progressed. Achievements in reforming food and agriculture however, are lagging behind reforms in other sectors of the economy and the macro-economic environment as a whole. The incentive framework for agriculture is almost distortion-free. The liberal environment, however, has not led to growth and recovery in the food and agriculture sector. According to FAO estimates, cumulative sectoral real income in agriculture, as measured in the national accounts, declined by 24.4% from 1992 to 1995. 2 Estonia 4. Reduced real prices are supposed to create incentives to make farming more efficient and competitive, unfortunately in Estonia, the changes of relative prices were combined with slow progress in sectoral reforms. The most critical areas are: a) the land reform and farm restructuring, which is progressing rather slowly due to complicated restitution processes; and b) privatization of agro-processing where the method of privatization has not resulted in transparent ownership at most of the agroprocessing enterprises. As a result, with the exception of a few commercial farms operating on the best land, the bulk of the sector is not able to produce competitively under the given conditions and the sector is in decline and stagnation. The new urban Estonia shows signs of recovery, while rural households are lagging behind. Most of these are in worse economic condition than they were a few years ago. Thirty percent of arable land was left uncultivated in 1996 and some rural areas are losing population. 5. There is an ongoing debate in Estonia to define the future role of agriculture and to adopt a new agricultural strategy for the country. The difficulties of adjustment from the old distorted production system is combined with the problems of coping with the pressure created by the new liberal policies. The social tensions emerging as a result of the increasing regional differences, and by the growing division between the urban and rural segments of the economy, have created new concerns that need to be addressed by the Government. The open trading regime and the liberal macroeconomic policies have been increasingly threatened by growing pressure for the introduction of more protectionist policies to protect farners' incomes and to bring Estonia's agricultural policy closer to the CAP model. As a result of this pressure, the Agricultural Producer's Income Law was passed by the Estonian Parliament in July 1993. It calls for producers and the state to negotiate target prices that would be fixed at levels ensuring income parity between and agricultural and industrial sectors. An income parity objective was also written into the Agricultural Market Regulation Law, which was passed by the Parliament in October 1995. The new law allowed the Government to use import duties, commodity reserves, and export marketing support to maintain market prices within 5% of the target prices resulting from the income goals fixed by the Agricultural Producer's Income Law. To administer the new system, the creation of a State Fund for Market Regulation was envisaged. Fortunately the two laws which would have created a highly distortive macroeconomic and trade framework in agriculture have still not been put into effect due to budgetary considerations and the conflict of interest these laws would have on the rest of the economy. The debate on the future of agriculture and the introduction of a more supportive sectoral policy framework, however, is not finished. 6. The development of a National Agricultural Strategy is being supported by an FAO team. This strategy is supposed to cover not only primary agriculture, but also forestry, fisheries, and agricultural services, as well as the rural economy as a whole - including the social problems faced by the rural population during transition. The existing policy documents indicate that policy makers are concerned with three: principal objectives. These are: Agricultural and Forestry Policy Update 3 * improving the rural standard of living and the quality of life, including providing an adequate social environment; striving to achieve approximate equality with urban areas in these respects; * reducing the trend toward depopulation of some rural areas, especially the border regions; and, * ensuring a degree of food security for Estonia. 7. Unfortunately, creation of an internationally competitive agriculture sector is not receiving the appropriate emphasis. The development of the National Agricultural Strategy, as it is envisaged and managed by the Ministry of Agriculture, is an attempt to modify current policies and to obtain some type of economic compensation to the sector for the negative effects of prevailing macroeconomic policies. It is questionable, however, how far the sector will be able to succeed in modifying the overall liberal trade and macro policy framework, and prevailing exchange rate policy. 8. For Estonia, which is a small, open economy, the liberal and non-distortive trade and macro policies have overwhelming advantages. The most appropriate way of preparing the sector for EU accession is to develop an agricultural system which is competitive on the open market. This system, both in size and structure, needs to be quite different from the system in place during the Soviet era. It is essential therefore, that the policy response to rural social problems and demands of the agricultural sector for more support take an appropriate form and not a form that creates new sources of inefficiencies and distortions in the economy. The quick completion of unfinished reforms in agriculture seem to be the most important means of improving competitiveness and farm incomes. Therefore, the completion of the remaining tasks in transition need to be treated as the most important short-term priorities, these include: a) acceleration of the completion of land reform, including settlement of land ownership issues, acceleration of privatization of unclaimed state-owned land, the accelerated progress in land titling, and improving land legislation; b) creation of more transparent ownership structure in agroprocessing conducive to increased participation of foreign investors together with the increased use of bankruptcy procedures to speed up restructuring, downsizing, and modernization; c) further progress in institutional reforms and strengthening rural financing and advisory services; and d) funding and appropriate institutional arrangements to provide a cost effective and equitable social environment. 4 Estonia 9. It is obvious that maintaining a liberal macro environment in the sector has overwhelming short-term and long-term advantages, and it is also the most beneficial policy in regard to EU accession. At the same time, an adequate response to growing pressures demanding an adjustment in the macro environment in order to promote agricultural growth and the recovery of the rural economy, needs to be found. To complete the sectoral transition, the provision of non-distortive budgetary supports to enhance productivity and competitiveness, such as provision of public goods, improvement in rural infrastructure, seem to be the most appropriate means for promoting agricultural and rural growth while maintaining an overall, undistorted macro environment. Sectoral Performance in 1995 - 1996 10. Growth. After reaching artificially high levels of Gross Agricultural Output 1986-1996 production as a result of the highly distorted and inconsistent 120 incentives of the Soviet period in 1O 1986-89, agricultural production in so Estonia fell sharply in the early 6o 1990s, and the decline has been -+-Total slower, but continuous since then. 40 - Crops According to official statistics, 20 - - Lvestock gross agricultural output, was 47% 0 M- 0 o- 9 V V In tb U) C" 0) C 0) 0) lower in 1995 than 1986; an 8 additional 1-2% decline is forecast 1986=100 for 1996 (Table 2 and Figure 1). Livestock production dropped by Figure 1 52% and crop production by 43%, with the result that the share of livestock production in overall gross agricultural output declined from about 70% in 1986 to 55% in 1995. Relative to other sectors, the decline in food processing industries was more modest from 1991 to 1993. However, while most other industries started to grow once again in 1994, food processing industry output continued to decline by another 10% during the last two years, compared to the 1993 level. 11. As a result of the continued contraction, since 1991 the relative importance of agriculture in the Estonian economy decreased dramatically. The share of agriculture (including hunting and forestry) in GDP fell from about 15% in 1989 to about 8% in 1995. The sector's share of employment has also diminished, dropping from about 12% in 1991 to 8% in 1995. Agroprocessing industry had an additional 4% of total employment in 1995. Investments in agricultural and the forestry sector were low as well, and amounted to no more than 2-3% of total Agricultural and Forestry Policy Update 5 investment in 1994-95, reflecting the profitability of production and the temporary excess capacity. 12. Consumption. In the 1990s the rise in prices, combined with the decline in real incomes, led to a decrease in food consumption. Estonian food consumption in the 1980s, particularly in livestock products, was relatively high, even by Western standards. The lower level of overall consumption as is indicated by Table 3, therefore remains adequate. The most important change in consumption was a one third decline in meat consumption between 1990 and 1995. The most significant decline took place in pork and poultry meat consumption. Milk consumption also declined significantly. As a result of decreasing real wages, the average share of income spent on food rose from 28.4% in 1990 to 36.4% in 1991. Since then it fell back to 30% in 1995. Agricultural & Forestry Trade Balance in Estonia, 13. T r a de 1992-1996 Performance. Agricultural and food products 30000 1000 traditionally played an 0 important role in Estonian 25000- -1000 foreign trade. Between -2000 1990 and 1995, they -3000 1mExport accounted for between 17% 15ooo -4000 c---lImport and 24% of Estonian -5000 ---Balance exports. The country 10ooo -6000 traditionally was a net sooo -7000 exporter of food and -8000 agricultural products. 0 T -9000 Imports increased 1992 1993 1994 1995 1996* *1st 9 months significantly in recent years Figure 2 from 10% of total imports in 1992 to over 15% in 1996. As a result, in 1995, Estonia became a net importer of food and agricultural products (682.5 million EEK net imports). In 1996 the food and agriculture trade deficit increased further, and in the first nine months of the year amounted to -1255.9 million EEK (Table 4 and Figure 2). There has been a significant shift in trade relations, however Russia, Ukraine, and the other Baltic countries have remained the major destinations for Estonian exports (65%) (Figure 3). The most important agricultural and food commodities exported were dairy and fish products, sugar, cocoa, and confectionary products. Most imports, mainly sugar, confectionary, cocoa products, grain, and beverages (including alcohol), originate in the EU (Figure 4). Sugar and cocoa imports are re-exported to the CIS countries. Forestry is increasingly becoming a source of export earnings. The positive balance of trade in wood and wood-based products increased five-fold from 1992 to 1995 (in 1995 it was 2.6 million EEK), more than offsetting the increased trade deficit in food and agricultural products. 6 Estonia 14. P r i m a r Agriculture. The total size of arable land (1.1 million ha) has Exports of Food and Agricultural Products changed very little in recent by trading partner (1st 9 months of 1996) years. Only about 70-80% of Finland Ukraine 3% Other this land has been cultivated 13% 21% since 1994; mainly in summer cereals such as barley and oats and also green fodder (Table Netherlands 9% 5). In 1994-95 of arable land was planted in fodder crops. uLthuania Due to climatic and soil 7 conditions, and inadequate technologies, yields of major Russia crops are lower than in 40% developed countries with similar climatic conditions (Table 6). The use of fertilizers and chemicals is declining and the state of the Figure 3 drainage systems continues to deteriorate. The decrease in livestock numbers has continued in recent years, reflecting the fundamentally changed conditions for Imports of Food and Agricultural Products Estonian livestock production by trading partner (1st 9 months of 1996) (Table 7). Given the .atmar geographic and climatic r [ conditions of the country, 6% , ; Other however, in the long term there 36% Sweden are not many viable alternatives 4- for agricultural production, Gemn other than livestock - mainly as beef and dairy production. The total agricultural area in Estonia now comprises 1.4 million ha, Netherlands which represents only 30% of Finland the total land area in the 20% country - one of the lowest proportions in all of the three Baltic republics. The more than Figure 4 Agricultural and Forestry Policy Update 7 1.1 million ha of arable land, with a comparatively low soil quality and short growing season, has been used to grow cereals and fodder for animals. 15. Agro-processing. The food industry's leading activity is meat processing, which accounted for 22% of the total value of food production in 1995, followed by dairy products (20%) and fish processing (17%). Because of a fall in domestic demand and increased competition from imports, production fell sharply in all branches of food processing in the early 1990s. The capacity utilization rate in the dairy industry ranges from 33% for milk powder to 80% for cheese. In the fish processing sector, activity increased since 1993. The level of inherited technology in food processing is a serious constraint to increased food exports to western markets (in the second half of 1996 none of the Estonian meat processing plants were licensed to export to the EU or the US). 16. Forestry. Forest areas amount to 44.5% of Estonia's land area, and represent one of the most important natural resources of the country (Table 8). The annual increment of growth is around 8 million cubic meters (Table 9), providing a significant export opportunity for timber and wood products. Currently this potential is underutilized, only about 4 million cubic meters were cut in 1996. The annual cutting, however, has increased significantly compared to the pre-reforn period. Forestry provides an alternative use of land that is marginal for agricultural use. Commercial reforestation however, is a rather significant investment. Natural reforestation is already in progress on some of the continuously uncultivated agricultural areas. Land Reform and Farm Restructuring 17. Estonia started early in transforming its agricultural structure and was quick to establish farms based on private ownership. The country opted for a physical restitution of the expropriated property, including land, and this has turned out to be a major problem. Land reform and farm restructuring is clearly lagging behind macroeconomic reforms and overall privatization. The unfinished land reform and land privatization process is probably one of the most critical constraints on increasing competitiveness and sector recovery. - 18. Slow Process of Land Privatization. The procedures selected for physical restitution, compensation, and replacement significantly slowed down the process of assigning property rights to all agricultural land in Estonia and the restructuring of the inherited large-scale farms. The restitution process, so far, has not resulted in transparent ownership in the majority of cases, as a result largely unrestructured former large-scale farms operate on almost half of agricultural land. 8 Estonia Only 20% of Agricultural Land has Individual Potential Owners and only Process of Land Restitution 50% is Claimed. The *administrative settlement of ownership is a time - Applicants presented their clairris to the Restitution consuming and expensive process driven Commission, which was attached to a district government. With the help of archives, the Restitution by a relatively large number of laws and Commission reviewed each claim and assessed its regulations (see Table 10 and Box 1). It validity. The rightful owners were identified and is estimated that restitution claims cover registered. some 50% of agricultural land in Estonia. - The claim was then sent on to the Municipal In about 20% of agricultural land, there Authorities, which confirmed its validity and decided on are no major contradictions between the restitution or compensation. Finally, they determined, previous owners and current operators of together with the applicant, the conditions of return, and the land and buildings, making it established the documentation or the cadastre unit. relatively easy to return the land to the - A Surveyor determined the boundaries of the cadastre previous owners. About 30% of land is unit if no accurately mapped boundary information subject to contradictory claims that will existed and passed the documentation on to the Land not be easy to settle. About 50% of land Board. has no claimants or previous owners - The applicant applied to the Land Board for the (Figure 5). The settlement of disputes is registration of the cadastre unit and for registration of his rather slow, due, not only to the ownership rights to the unit. complicated procedures, bit due also to - The Land Board sent a map of the cadastre unit to the the lack of resources in the local courts applicant who had to apply for the marking out of the and municipalities for these tasks. land. * Only about 10% of Rural Land has been - The marked out land was registered in the cadastre. Titled to Private Owners. The Estonian - The Municipality presented the cadastre unit for titling National Land Board (ENLB) was to the Title Office, which registered the cadastre unit as a established to implement and oversee the property belonging to the owner(s). land reform process, including - The applicant was informed and received a map of the maintaining and updating land cadastre. cadastre unit. Individual claims for restitution had to be submitted to the local restitution Source: Estonian Land Board commissions which made the initial decision on the claim (see Box 1). In Box 1 regards to land restitution, about 160,000 claims were filled, and about 90% of them were evaluated by early 1996. However, only about 20,000 cases, covering about 10% of the agricultural area, were fully processed, including registration in the title book. The Estonian Government, in November 1996, issued regulations to simplify the land privatization process. According to local experts, the new regulations alone will not lead to significant acceleration of this process unless significant additional financial resources are made available. With current procedures and funds (which seeks full physical return of the original property), the completion of the land Agricultural and Forestry Policy Update 9 restitution process will take an Land Distribution at the End of 1995 additional five years at best. Delays in Privatizing State- owned Agricultural Land. Land subject to About 90% of agricultural land Land subec tonocntaior Abu 0%o grclurlln contradictory restitution claims is still state-owned and used on restitution claims 20% a short-term lease basis both by 30% family farms and restructured collectives as well as larger a incorporated farms. Assuming the full completion of land restitution, about 50% of agricultural land will remain inLand not covered state ownership. The local by restitution municipalities are entitled to claims privatize the remaining state 50% owned land for vouchers and Figure 5 through cash auctions. Very little progress has been made in this area, although since mid-1996, legal persons are also able to obtain and to own agricultural land. Significant portions of the state owned land are used by the successors of former Kolkozes and Sovkhozes, which still provide significant employment in rural areas. The acceleration of state land privatization would create additional pressure on these farms, most of which are in a very difficult financial situation, which is not in the short-term interest of the local municipalities. * Markets for Land are at an early stage of development. There are no legal limits for buying and selling land. Foreign ownership, however, is restricted primarily to construction sites. Only land registered in the land book can be sold. The initial price for state-owned land is 4,000 EEK per ha (on average). As indicated above, there is rather limited interest in buying land. There is a quite active lease market, although fees are rather low due to the fact that the leases for state-owned land are equal to the land tax of US $2 per ha per year, on average, and there is an abundant supply (30% of the agricultural land remained uncultivated in 1996). 19. Farming Structure Reflects the Unfinished Process of Land Reform. Before independence, agricultural production was organized in 350 large collective and state farms. Nearly all the assets of state and collective farms have been privatized and the farming structure is developing towards smaller sized private farms. The change in the farming structure, however, is still at a rather early stage and about half of the land is still cultivated by barely restructured large-scale farms. In principle the Estonian government does not favor any particular type of farming and the restructuring of the inherited large-scale farms is far from completed. Currently, the farm structure is characterized by three different types of farming 10 Estonia operations (Box 2): Contribution of Various Farming Categories * Larger corporatized farming to Agricultural Production in 1995 enterprises created as a result of Total Use of transformation of the Kolkhozes and Production Cultivated Sovkhozes. These are joint-stock (0) Land* companies, partnerships and Farm Enterprises 51 48 Family Farms 17 29 cooperatives, however in a sense, I_FailyFars_2 many (about 25% of them) still bearing Husehold Plots 32 23 the features of "Soviet-type" Box 2 collective farms, or having a rather transitional character. There were 873 such farms using 28% of total agricultural land and 48% of all agricultural land under cultivation, contributing 51% of total agricultural output in 1995 (Table 11). Since 1994, there has been a continuous decline in the number of these large-scale enterprises as the privatization process continues. They are dividing into smaller entities and many shareholders will take their land and set up their own private farms. The time-consuming process of ownership settlement, as well as the low profitability of agricultural production, and the difficulties in obtaining start-up capital, significantly slows down this process. Only about 20% of these enterprises function relatively well, while 20-30% are in serious financial difficulties. * In 1996 about 20,000 family farms (Table 12) operated with an average area of 21 ha (Table 13). Only about 25% of them had registered their land titles as of mid-1996. Twenty four percent of agricultural land was used by family farms in 1996, which equals 29% of the total cultivated area. Their contribution to total agricultural output was 17% in 1995. It is expected that the number of family farms will further increase in the near future, their number increased by over 6,000 in 1995 and at least another 5,000 new private family farms are expected to be established in 1996, indicating an acceleration of land reform and increased interest toward family farming. Full-fledged private family farms concentrate on crop production. According to recent surveys, about 30-40% of family farms are doing well, especially those which were able to obtain land and equipment in the early period of transition. * There are more than 130,000 small and non-registered subsidiary plots, with an average area of 1.7 ha, often operated by the shareholders of the large farming structures to supplement their wage income. This farming category used 18% of agricultural land, 23% of the cultivated area in 1995, and contributed, by 32% to total agricultural output (Table 11). 20. Farmer's Organizations. In the process of land reform, two organizations emerged to represent farmer's interests and provide support services. The Estonian Farmer's Union is the major organization representing private family farmers, with 6,000 members in late Agricultural and Forestry Policy Update 11 1996. It provides advisory services and information as well as interest representation. The Agricultural Producers Union was created by the larger farming enterprises (about 200 current members). The third organization with agricultural relations is the Estonian Cooperative Union, which is mainly related to consumer cooperatives. All of the these organizations are lobbying for more support for agriculture, however, the Farmer's Union would prefer to get more budgetary support for development and initial capital, while the other two organizations advocate for direct income transfers. The Farmer's Union policy seems to be more consistent with the overall objective of creating competitive agriculture in Estonia. 21. The full completion of land reform in Estonia still requires further action and Government attention. The most critical tasks are as follows: a) simplification and acceleration of the restitution process, including the titling of newly privatized land; b) development and adaptation of strategies for the privatization of unclaimed state-owned agricultural land together with measures to facilitate a speedy further restructuring of remaining large-scale farms and consolidation in farm sizes; c) refinement of the legal framework for service cooperatives in agriculture, providing a framework for the emergence of new support structures to private agriculture; and d) the creation of institutions required by land markets and promotion of the emergence of land market agents and appraisers. Privatization of Agroprocessing, Retail Trade, and Services for Agriculture 22. The privatization of industry and trading was among the major initial objectives of the Estonian economic reform in the wake of independence. This objective was almost fully realized by the end of 1996. The privatization of agroprocessing and upstream and downstream sectors are also close to completion. The privatization of agro-industries, however, has been somewhat delayed and was subject to a privatization methodology different from that applied to other sectors. This method of privatization inhibited foreign investment and did not result in real ownership, or owners with sufficient funds for investment and technical improvements. As a result, both upstream and downstream sectors remain ill-adapted to the needs of new private farming and to the requirements of competitive international markets. 23. The Impact of Article 32 of the Law of Privatization. As a result of political pressure from primary agricultural producers, a separate track was created for the privatization of state- owned grain mills, milk, and meat processing enterprises, and the Estonian Agricultural Machinery Service. So-called "processing cooperatives" were formed by those who produced 12 Estonia agricultural products for processing or used machinery services. These cooperatives became entitled to buy upstream and downstream enterprises at preferential terms, including the opportunity to pay only 10% of the selling price as a down-payment. At the same time, the processing cooperatives committed themselves to continue production and maintain employment as well as submitting annual business plans for review by the Privatization Agency, until the purchase price has been fully paid. By the end of 1996, practically all industries falling under Article 32 were privatized and converted to processing cooperatives, with the few exceptions of liquidation cases. 24. After the first couple of years of operation, there is considerable evidence that indicates that giving preference to processing cooperatives may not have been the best strategy. The lack of financial resources, and of technical marketing and business skills, clearly hold back the development of most of the industries concerned. Some of these companies are already bankrupt or operating with significant financial difficulties, and are unable to adjust to the new competitive situation. Banks are also reluctant to support the cooperatives financially, due to the vaguely defined cooperative ownership responsibilities. One of the most significant negative impacts is that this procedure has become an impediment to the flow of private domestic and foreign investment. Yet there are no legal obstacles that prevent processing cooperatives from reselling the enterprises, or that prevent implementation of bankruptcy procedures to accelerate changes in ownership. 25. Privatization of Other Food Industry Branches. Brewing, confectionary, baking, tobacco, and other industries not mentioned above were privatized under the general regulations for privatization. As a result, foreign investors have acquired significant interest in these activities and have invested significant amounts since then. There have been new, mainly smaller-scale investments, in the industries privatized under Article 32. For example, according to the Ministry of Agriculture, new entrants have captured as much as 30% of the meat market. 26. Input Supply and Food Trading. During the last five years, the whole domestic trading system in Estonia was completely overhauled and privatized. The former state input supply organization was dismantled and Estonian farmers can now acquire machinery and variable inputs from different private suppliers offering products of both (eastern and western origin. Eastern products are still significantly cheaper and are therefore preferred by farmers. The food retail trade system is also fully privatized (the share of state-owned enterprises in total retail trade is less than 5%). There are over 6,000 food retail shops in Estonia. The largest network is run by the Central Society of Estonian Consumers Cooperatives (ETK). The retail trade is becoming dominated by larger shops. Just one-third of the retail shops account for about 70% of total retail trade. Foreign trade of agricultural products is highly competitive, and many trading companies and food processing enterprises are involved in transit trade between Western companies and Russia. Agricultural commodity exchange markets have not yet developed in Estonia. Agricultural and Forestry Policy Update 13 27. A working and efficient agroprocessing industry capable of producing products for domestic and international markets, and efficient rural services, are critical elements for the recovery of the agricultural sector and of rural Estonia. Further actions are therefore needed to create independent or private owners of agroprocessing industry who can efficiently control management and bring in additional investments. Priority should be given to rural SME development. In order to achieve this: a) post-privatization programs, including the revision of initial commitments regarding production and employment, should facilitate the restructuring and consolidation of enterprises privatized by processing cooperatives; b) the emergence of secondary markets for cooperative ownership of agroprocessing enterprises should be promoted and facilitated, including the promotion of foreign investment; c) competition should be increased by the enactment and enforcement of anti-monopoly legislation; d) strictly enforced bankruptcy legislation should be used to consolidate the newly established private sector, especially the segment owned by processing cooperatives; and e) the emergence of rural small and medium agroprocessing and service enterprises should be facilitated by improved registration procedures and advice. Reforms in the Forestry Sector 28. In general, reforms in forestry are more advanced than in agriculture. In 1991, the Government initiated a restitution program to return former private forests to their original owners or their heirs. An institutional reform program has been implemented to change the management of forestry resources in the country and the forests remaining in state ownership. A National Forest Policy, providing a framework for longer term development of the forest sector, and defining the role of the public sector is being developed with Scandinavian assistance. * Privatization of Forests. As a result of the restitution process, the area of state-owned forest will be reduced to the area owned by the state in 1940. This is approximately 50% of all forest resources. The actual restitution follows similar procedures as in agriculture, and legally it is proceeding relatively slowly. As of July 1996 about 160,000 ha of forest land had become private property, out of about 1,000,000 ha subject to restitution (Table 14). The privately owned forests are rather fragmented, the average size of a private woodlot was 11.3 ha in the middle of 1996. 14 Estonia * Role of the Public Sector. The Government intends to reduce the state role in forestry to regulation and use commercial methods in managing stated owned forest. The Ministry of Environment is the responsible government body. Under the Ministry of Environment, the Forestry and Fishery Board is responsible for policy development, regulations, and controls, while the State Forestry Management Organization is in charge of managing state owned forest. * Support to Private Forestry. The Government intends to support the private forestry through forest owner associations, which are now just being created. The Government will provide a first round of forest management plans for the privatized forest land free of charge and an extension service to enable the new owners to use these plans. At a later stage, both forestry management planning and an extension service will be provided on a commercial basis. * Lack of Wood Processing Industry. The efficient utilization of Estonia's significant forestry resources is greatly constrained by the underdeveloped wood processing industry. Wood processing can be an activity which provides new employment and income to rural areas, therefore it should be encouraged by the Government. Maintaining a Liberal Macro Environment for Food and Agriculture 29. The creation of an almost distortion-free macro environment has been one of the major achievements of recent Estonian economic policy. Prices are fully liberalized and there is an open trading regime, and government intervention and subsidization in the sector is minimal. This policy however, has had a mixed effect on the food and agriculture sector. While it is obvious that maintaining an overall liberal macro environment for the sector has overwhelming long and short-term advantages, there is growing pressure to make adjustments in the macro environment which would promote agricultural growth. 30. Pricing Policy. There is no Government price intervention in the sector. Both producer and consumer prices are determined freely by supply and demand. Following the macro-economic reforms in 1992, there was a marked deterioration in the agricultural terms of trade. Between 1991 and 1994, input prices increased by a factor of 17, while agricultural producer prices increased only 11 times. In the same period, retail food prices rose by a factor of 29, not only eroding the purchasing power of agricultural revenues, but also reducing the producer's share in the final price of agricultural products. Table 14 compares major food retail prices in the three Baltic countries. 31. Trading Regime. Estonia has a free trade regime, with no tariffs on exports or imports. Estonia does not subsidize exports of agricultural products, however modest funds are available for export promotion, and the exporters of food and agricultural products are sometimes able receive export financing credit from the Estonian State Fund for Export Credits. At the Agricultural and Forestry Policy Update is same time, Estonia has felt the negative impact of the protectionist policies of both Western and Eastern countries. Current Russian trade policy is particularly disadvantageous for Estonia. Since May 1995 the Russian government introduced double tariffs on Estonian agricultural commodities and Russian non-tariff barriers (such as difficult process of certification and limited inspection service at borders), represent additional significant impediments for Estonian exporters. Western barriers are more subtle, and are mostly in the form of health and quality standards. 32. Taxation. In Estonia, farms are generally subject to the same tax rules as other businesses, with some exceptions. Farmers whose annual turnover is below EEK 25,000 are exempt from income tax. Farmers who established their farm under the provisions of the Law on Peasant Farming, are exempt from income tax during their first five years of operation. Farmers are supposed to pay a dual rate land tax (0.5% of land's taxable value to the central Government and an additional 0.3% to 0.7% to the local authorities). To avoid land tax, many people delayed the registration of newly acquired land, consequently the land tax payable to the central Government was suspended until the end of 1997. In general, the Estonian farming sector is very modestly taxed. According to the Ministry of Agriculture, income tax payments in 1994 amounted to only 11.4 million EEK, while land tax was paid only on about 160,000 ha in 1994 (23.8 EEK per ha or US $1.80 per ha), yielding a total of 3.7 million EEK in land tax payments. 33. Free Trade Agreements. Estonia has signed free trade agreements with the other Baltic States that include provisions for agriculture. The country has a trade agreement with the EFTA countries as well as with Russia and Ukraine. The agreement with Russia has not become effective. The agreement with Ukraine has already resulted in increased trade in food and agricultural products. While other Baltic countries such as Lithuania are interested in joining CEFTA, Estonia, due to its Nordic orientation, has limited interest in this organization, although the country is currently negotiating free trade agreements with several CEFTA member countries. 34. WTO. Estonia submitted its application for WTO membership in March 1994 and is currently negotiating its entry into the organization as quickly as possible. In the process of negotiations Estonia intends to preserve the option of implementing trade and agriculture policies similar to those applied by other Baltic countries and the EU, and presented tariff ceilings that are close to those applied in other countries in the region, and not the zero rate tariffs currently applied in Estonia. Estonia would also like to retain the option of applying moderate subsidies and export support for agricultural products. As of late 1996, the Estonian proposals were still under discussion and had not been accepted by other WTO members. 35. The European Union. Estonia signed a free trade agreement with the European Union (EU), which came into force on January 1, 1995. The Europe Agreement, signed in June 1995, inherited the trade concessions of the free trade agreement and established a framework for strengthening the cooperation with the EU and envisages Estonia's full 16 Estonia membership in the union. The trade concessions provided by these agreements, compare favorably with the volume of previous food and agricultural exports to the EU-12. However, since Finland and Sweden became members of the EU, these quotas might limit Estonian exports to the Nordic countries. 36. The potential for EU membership has created new opportunities and tasks for the Estonian food and agriculture sector. During the last few years Estonia received significant support from the EU through the PHARE program. Initially, this was in the form of general support for the process of transition, and now it is in the form of preparation support for accession to the EU. The preparation for EU membership is a critical task for the whole sector. The most critical issues which need to be resolved include: * preparation of a detailed strategy for agricultural policy actions up to the period of accession and a strategy and information base for negotiations; * harmonization of legislative and regulatory frameworks with EU standards; and * improvements in institutions and administration of public services to be able to cope with the difficult task of implementation of the evolving Common Agricultural Policy. Government Support Programs and Investments 37. Estonia has a modest agricultural budget (260 million EEK in 1996 and 301 million EEK budgeted for 1997), compared to the role of agriculture in the national economy. After independence, the agriculture related subsidies were either discontinued or modified. In nominal terms the budgetary allocations have increased since 1992, however, taking into account the inflation rate, the real value of budgetary support has significantly declined between 1992 and 1995. According to OECD estimates, spending on agriculture was relatively high in 1992 (accounting for about 12% of total Government expenditures), but its share fell to 5.2% in 1995 (Table 15). The budgetary relations of Estonian agriculture measured by the Producer Subsidy Equivalent (PSE) indicate a modest overall taxation of agriculture. The percentage of PSE in 1992 was positive at 29%, after a slight increase to 31% in 1993, it continued to decline to - 2% in 1995 according to a recent OECD report. While there is a low level of support to agriculture in Estonia, the comparable PSE indicators reflect a 42% average support level in OECD countries and a 15-20% support level in other Central East European countries (Poland, Hungary, and the Czech Republic). As in producer subsidies, a decline in consumer support in Estonia is reflected by the Consumer Subsidy Equivalent (CASE). The level of implicit consumer subsidies decreased from 77% in 1992 to 4% in 1995. 38. Current Agricultural Related Budgetary Expenditures. Table 16 provides an overview of recent direct government budgetary expenditures to the sector, managed by the Agricultural and Forestry Policy Update 17 Ministry of Agriculture, while y o Aicltudes ohe Budget of the Ministry of Agriculture Table 15 a(Total Expenditures of 246 million EEK - 1997) government expenditures channeled outside the Ministry of Regulatory Agriculture. The 1997 budget Extension Services allocation for the Ministry of 11% 35% Agriculture is 295 million EEK, : of which 246 million EEK is for recurrent Ministry allocations, rain Reserves and 49 million EEK for public 13% investments (see Figure 6). MOA Staff 6% * The agriculture related budgetary expenses cover 23% Amelioration agricultural administration, 12% the operation of regulatory services, education, research, Figure 6 and public investment. * The public support programs include several so-called national development programs providing resources for research, development, extension, and training in the major areas of production. The total amount of these programs is about 40 million EEK. These programs do not create any distortions. * Another significant component of Government expenditures, 20 million EEK in 1995, and 28.5 million EEK in 1996, is related to the maintenance of grain reserves. * The only direct subsidy to farmers is related to the Agricultural and Rural Life Credit Fund (ARLCF) managed by the Ministry of Finance. In 1993, 125.4 million EEK was provided by the budget, and in 1994 that figure was 83.1 million EEK. On average, each year in 1995 and 1996, 50 million EEK was provided by the budget. These amounts were distributed as loans. If we assume that the annual interest rates were 5% lower than those for commercial credits, the related subsidies can be estimated around only 5-6 million EEK per year. 39. Policy and Regulatory Functions. Estonia is an associated member of the EU and has undertaken significant efforts to prepare for accession to the EU. These tasks require highly skilled and motivated public servants in the MOA. Presently, the salary structure is not competitive with the private sector and MOA is already facing difficulties in keeping their high quality staff. This trend is likely to continue if salaries for MOA staff are not increased. 40. Public Investment Program. Public investments in the sector are modest and MOA manages about 49 million EEK, about 2% of total public investments in 1997 (Figure 7 and 18 Estonia Table 17). The PIP estimates that about 160 million EEK or about Budget of the Ministry of Agriculture 3%bofthe totl mlin n t wl o bet (Public Investments of 49 million EEK - 1997) 3% of the total investments will be Ln Land invested in the agriculture sector Constructon of Amelioraton from 1997 to 1999 which includes Buildings o 31% investments financed by the World 23% Bank's Agriculture Project. The majority of the public investments are provided for investments in existing buildings, drainage Regulatory R I rehabilitation, and rural 2% infrastrcture infrastructure. Education 32% 41. In addition to the 12% Ministry of Agriculture budgetary funds, 52 million EEK is allocated I to the Land Board (Ministry of Figure 7 Environment) for recurrent expenses and to accelerate the land reform in the rural areas and 60 million EEK is budgeted to replenish the Agriculture and Rural Life Credit Fund. Seven million EEK is provided to the Forestry and Fishery Board, which also is under the Ministry of Environment. Considering these additional allocations, the budgetary allocation for the sector is still rather modest compared to the role of the sector in the overall economy. 42. Estonia's agriculture is one of the least protected and subsidized in Europe and compares favorably with Australia's and New Zealand's agriculture. Nevertheless, there are a number of possibilities to reduce expenditures on the one hand, and, on the other hand, to increase certain services to maintain and improve core Government functions. These include: a) gradual increase of the user contribution to the drainage rehabilitation costs; b) reduction of the strategic grain stocks and possible replacement through a fiscal reserve fund to import grains in years of shortages; c) elimination of further budget allocations to ARLCF, but instead promote lending through commercial banks to agriculture; d) increase of budgetary allocations to accelerate the issuance of land titles; and e) increase the salary level for key public servants in MOA to keep high quality staff. Agricultural and Forestry Policy Update 19 Improved Financing for Food and Agriculture 43. The limited availability of credit, particularly long-term investment credit, has been a major constraint in the rural economy. The Estonian banking system has undergone radical reform since independence. In food and agriculture, first the State Agricultural Bank, which specialized in providing credits to agriculture and agro-industries, was restructured and became the Estonian Land Bank. It was then split into 14 independent commercial banks. Later, three of these formed the new Estonian Land Bank and another 10 merged to become the Union Bank of Estonia, while the remaining bank stayed independent. These banks still play an important role in financing the sector, though in general commercial banks have limited interest in lending for farming and other rural activities. 44. To overcome the general lack of financial resources for the farming sector and the reluctance of the banking sector to provide credits to agriculture, several specialized funds were created to provide affordable credits and grants to agricultural enterprises and rural areas: The Agriculture and Rural Life Credit Fund (ARLCF) is mainly funded by the state budget and was established in 1993 to provide credits on favorable terms to the farming sector and to the rural economy. The banks authorized to distribute these funds, receive money from the ARLCF at a 5% annual interest rates, while the ARLCF receives the money interest free from budgetary outlays. The ARLCF is the major financier of the fanning sector at the moment, available credit funds in 1996 were auctioned among banks interested in the distribution. In 1996 the banks distributing the credits charged on average a 6% additional mark up on longer term loans and 8% on short-term loans, resulting in overall interest rates of 11%-13%, only slightly lower than current commercial bank interest rates. The Fund's current portfolio is 318 million EEK, including 50 million EEK in short-term loans. Credit is provided mainly to farmers and agricultural service and processing enterprises (75%-80%). The rest is lent to the forestry sector. There is an increased demand for equipment leasing services. In the last four months of 1996, 20 million EEK was provided for this purpose. The percentage of non- performing loans is very low (2%-3% to date). * Counterpart Funds. The food and agriculture sector has received financial support from counterpart funds from the sale of food aid given to Estonia. The largest project financed from the counterpart funds is the Rural Business Development Fund (RBDF). The fund was created in June 1993 and financed from the sale of grain donated by the EU. The fund has so far received 45 million EEK for the use of capital grants for the purchase of equipment and working capital by small enterprises. The sale of US grain in early 1993 - raised about 30 million EEK, which was allocated as credit to farmers by the Union Bank of Estonia. 20 Estonia The Rural Credit Guarantee Fund is being created based on the transfer of 60 million EEK from the Ministry of Agriculture, and using the accumulated interest from the counterpart funds. This amount will be used by banks selected on a competitive basis to provide guarantees to banks for credits in agriculture and rural development. The fund is not yet operational, it is being organized with technical assistance from EU-PHARE. Creation of Institutions Required by a Reformed Food and Agriculture Sector 45. Estonia has implemented significant reforms to create the institutional and legal environment required by a market-based privatized agriculture. The quality of services provided by the new or reorganized institutions, however, does not yet fully meet EU standards. The strenthening of public institutions and improvement in the provision of public goods and services, therefore, is one of the most important tasks for the coming years. 46. Public Administration. The Governmental institutions in the sector were fully reorganized in 1993 and again in 1995. The Ministry of Agriculture and the Ministry of Environment became the main institutions responsible for agricultural policy. The Ministry of Agriculture is in charge of developing and implementing agricultural policies while land reform and land registration (Land Board) and the Forestry and Fishery Boards belong to the Ministry of Environment. The Estonian Grain Board, being responsible for the quality control of grain, grain trade, and state grain reserve system, reports to the Minister of Agriculture. There is a plan to set up a State Fund for Market Regulation but no concrete steps have been made to create this institution. The Ministry of Agriculture, under the current structure (see Appendix 1), operates according to the needs of a market economy and has regulatory, policy development, and service functions. 47. Information and Statistical Reporting. The information system, including the monitoring of actual developments in the sector, as well as changes in the markets, is currently one of the most critical areas of the institutional framework. The inherited system was fully tuned to the needs and features of the centrally-planned economy and quickly became inadequate, given the conditions of the emerging market economy. The current needs of managing agricultural markets and the EU accession specifically, require a speedy development of a modem, EU-conforming agricultural statistical information system. Some elements of the EU-conforming information system are already in place (German-type farm management system), however, the current situation is far from adequate. The information provided is not fully reliable and not up-to-date, resulting in delayed and inaccurate policy decisions. Immediate improvement is needed and can be achieved by the use of survey methods to get information on evolving farming structures and changes in the supply and demand situation. 48. Extension. No Western-type agricultural extension system existed during the Soviet era. After independence, the first extension service system was established by the Estonian Agricultural and Forestry Policy Update 21 Farmer's Union, which now provides several advisors in every county. Recently the use of private advisors became possible as well. These services, supposed to be self-financing in the future, now receive only 10% of the advisory service costs from clients, while the rest is covered by the budget. The Government provided 9.5 million EEK for extension services in 1996. Out of that, 2.5 million was allocated to subsidize farmers to pay for private advisory services. 49. Education and Research. The reform of educational and scientific establishments began in 1993. Estonia has gone further in reforming agricultural research and education than any other FSU country. The Estonian Academy of Sciences was fully reorganized and lost all of its research management and fund allocation functions. The Agricultural University in Tartu has become the major institution of higher education and research, integrating all research institutes located in Tartu into the University. The remaining four institutes located elsewhere will be reorganized in the near future. Central research funds are managed by the Ministry of Education. At the University, educational programs have been reformed and both education and research became more closely connected to the world. These changes represent steps in the right direction, since in such a small country, there is a need for a concentration of research and educational activities and a closer integration with major international research centers. As an addition to the Agricultural University, there are 13 agricultural colleges and vocational schools located in the most important agricultural regions of Estonia. These train about 800 - 900 students per year, and in addition to farming, they also teach coastal fishing, timber processing, and agro-tourism. Rural Environmental Situation 50. In the 1980s the state of the environment in rural Estonia deteriorated markedly. A high concentration of livestock production led to problems with organic fertilizer disposal. Huge quantities of fertilizer and chemicals were used to meet production goals, and combined with inadequate spreading machinery and bad management, resulted in major problems. Soil was compacted by the weight of heavy farm machinery. Groundwater became increasingly polluted and small lakes suffered from putrification. As a result of farm restructuring and recent changes, the amount of chemicals and inorganic fertilizers decreased and most of the excessively large livestock farms were broken down or ceased to operate. The decline of agricultural activities in the last five years brought some relief to the environment and resulted in decreased pollution. It is essential that the emerging new private agriculture is surrounded by a proper regulatory framework and receives adequate advisory services to avoid an increase in environmental degradation. 51. About 739,000 ha of agricultural land is drained in Estonia, or two-thirds of the land area under cultivation, as well as some 500,000 ha of forest land. There are nearly 37,500 km of regulated water-pipes and drainage ditches altogether. Almost 90% of arable land under drainage is tile drained, while about 10% is drained by open canals, and the small remaining area 22 Estonia is under pump drainage. The FSU invested heavily in drainage and soil improvement, especially in the 1970s. Since then, almost no maintenance has been carried out on the drainage system, so that it is severely damaged in key sections of fertile areas. The Land Improvement Board of the Ministry of Agriculture is primarily responsible for drainage. Rural Living Standards 52. The income and employment situation is significantly less favorable in rural areas than in urban Estonia. Employment in rural areas has fallen considerably in recent years. Regional differences are becoming increasingly acute. Tallinn and the coast are relatively prosperous, while there is high unemployment in the north-east (burdened by obsolete Soviet-era industry) and in the south-east (dominated by agriculture). According to some estimates, the rate of unemployment in rural areas may reach more than 20%, particularly in the so-called "agro-cities" of former state and collective farms (Box 3). In those Rural Poverty in 1995 cases, the only source of income is the People below Share in Share in household plot. Increasing Poverty Line Total Poor Total unemployment in non-agricultural N) N) Population sectors of the critical areas has reduced Rural 14.7 44.8 25.7 the prospects of finding employment Urban 6.8 55.2 74.3 outside agriculture. Also, increasing Overall 8.9 100.00 100.00 transportation costs have reduced the Source: World Bank relative attractiveness of off-farm activities, and the high prices of Box 3 accommodation in urban areas have discouraged labor mobility. 53. The income of an average rural family is about 80% of a similar urban family. Poverty is more widespread and deeper in Estonia's rural areas. The share of the rural population living below the poverty line is more than two times larger than the urban headcount index. The rural poor tend to be poorer than the urban poor. They have average expenditure levels nearly 45% below the minimum pension. By comparison, the expenditure shortfall is just 27% of the poverty line in urban areas (Box 3). The real welfare gap between the urban and rural poor is probably somewhat smaller, since living expenses tend to be higher in urban areas. 54. Since independence, Estonia has placed considerable emphasis on regional development. Rural development policy remains at an early stage in formulation, and is still regarded as an aspect of regional policy. Few institutions have the role of promoting rural development, including the Rural Development Board, which is attached to the Ministry of Agriculture. As an addition, there are donor-sponsored projects with the objective of promoting Agricultural and Forestry Policy Update 23 rural local initiatives, such as the Rural Business Development Fund. The central Government provides funds for the development of rural infrastructure. Most of these funds are used for improvement of drainage systems, water supply and improvement of other rural services. World Bank Operations 55. The World Bank has been active in supporting macro-economic stabilization in the initial phase of reform, while current objectives are focussed on the development of a dynamic private sector, improve the existing public infrastructure, and alleviate the pockets of poverty that have developed during the transition process. The first involvement of the Bank in the sector in 1993-94 was the development of the Estonia Agriculture and Forestry Sector Review, which provides an assessment of potentials and highlights key strategy elements for the development of the sector. The Estonia Agriculture Development Project providing funds for public investments to accelerate land reform and improve the maintenance of rural infrastructure was negotiated in 1996 and is expected to be effective in early 1997. The Government of Estonia would like to continue World Bank involvement in the sector. There is significant interest in the various segments of the sector toward a second World Bank Agricultural Project that would provide credit for rural development, farm consolidation, recapitalization of farms, and improvement in rural financial services. The continued Bank activity in agriculture might include technical assistance and intellectual support to Estonia regarding EU accession issues and improve the provision of public goods, especially strengthening the regulatory institutions. APPENDIX 1 Ministry of Agriculture MINI5IER COUNSELLORS PRESS-SEXVICE 4 employees CHANCELt.OR VmCmCH aELOR Estg~a Sted IdVarietY~ Tcitihg nspection State lflas Accomtn Genem Department of Depanment af Department of D:parctnt of De*rtmien: of Veteuinu y Department DepAment Depaitment rnomy Rurl Economy eginnal Developm For:Ign Rlations EdLcaton and Drcparhnpt R e 632ernpIoyes 9 exployeet 8 empoyees : emcpkyees 2 anploytes 12 employem 3 empoyces i emplRoyces state Deparament. of Plant Poto Landirproverment ouresn Bui at of 61 employees StaffBureaL Pureau of4 And e&ecreta:lat Budget B~Lu Bueau Rgnal Eur a POIRCY IntergraJonl -l - m1wr iemkc eplume 4i 1rpoe 5 =mivn m ye PI ee Ereding Irspecdon Archives Bureau of Economlic Burau of State prypcrty and AMysm and Stati- Ehtre shl; Reform uesu m Develcp~ Plant 6 cnölgytes_S ; Qaarandre 9 eploycet 99 e wols . edSrlesTa- Bureau vd SeMtkes 4employcee 4 emptoyeeg Insp etae of Mahinery 59 emiployees ESTONIA Total Population 1.6 million Agriculture in GDP 1995 8% Decline of overall agriculture production 47% Rural Population 28% Food and agriculture in active labor (1995) 12.1% 1995/86 Food and agriculture in export (1995) 16% Decline of livestock sector 1995/86 52% Total Area 4.52 million ha. Forestry share in exports (1995) 16% Share of livestock (1995) 55% Agriculture area: 1.46 million ha. Food and Agriculture in imports (1995) 14% Share of independent family farms in total 29% Traditionally net exporter of processed cultivated land (1995) Arable land 77.5% foods: eggs, butter, cheese and flax, in Share of small subsidiary plots in total 23% Drained 66% 1995 Estonia became a net importer. cultivated land (1995) Orchards 1.0% Natural Grassland 21.5% Forested 44.7% ISSUE STATUS OF REFORMS WORLD BANK PROPOSED ACTIONS/OUTSTANDING REFORMS NEEDED 1. Macro-economic Framework for Completed price and market liberalization with almost no policy Maintain an open market-oriented agriculture sector. Agriculture distortion. A. Prices/Subsidies * All prices are freely determined. * Continue commitment to liberalized prices and markets. * No government procurement. * Avoid introduction of government intervention. * No government price supports. * No deficiency payment systems. * Currency has been successfully stabilized. * Competitive markets have bevii cireated based on minimal barriers to entry. * Budget financed rural credit fund providing credit with subsidized interest rates to agriculture and rural areas is still functioning. ISSUE STATUS OF REFORMS WORLD BANK PROPOSED ACTIONS/OUTSTANDING REFORMS NEEDED B. Trade Policies * No export or import restrictions on agricultural trade. * Remain a completely open economy and become a trading center for the Baltic states. * No tariffs for exports and imports. * Avoid introduction of new protectionist measures. * In compliance with IMF agreement. * Trade agreements with the EU and EFTA countries. C. Taxation * Principle of equality is prevailing in the taxation policy. * Do not create new distortion by introducing favorable taxation to certain groups. * Exemption from income tax for small private farmers. 2 ISSUE STATUS OF REFORMS WORLD BANK PROPOSED ACTIONS/OUTSTANDING REFORMS NEEDED 2. Land Reform and Farm Land is being restituted but the speed of reforms is curbed by Viable system of independently operated, privately Restructuring financial, technical and legal impediments. owned farms. * Nearly all of the assets of state and collective farms have been * Accelerate land reform via increasing resources and privatized. coordinating activities like cadastre registration and restitution among involved institutions. * Majority of the land is still held in various larger incorporated farms which descend from the former collective and state farms. * Introduce incentives to register land as soon as possible, e.g. tax breaks or other financial incentives. * The private farming structure has been developing towards smaller sized family farms with an average size of 24 ha. * Develop framework for a functioning land market especially by clarifying leasehold rights and obligations, * Actual process of formal transfer of land titles to the newly establishing market based rental rates for leasehold established private farms has been slower than desirable. properties, and facilitating the transactability of leasehold rights. * The lack of security and transferability of leasehold has become a major impediment to the access of financial markets by those farmers * Include state land into this market and resolve the issue that use unregistered lands. of how it will be disposed (either sale or long-term leases). * Large proportion of the necessary farm drainage infrastructure is in poor condition. * Upgrade and increase efficiency of farm drainage infrastructure. * Maximum land rental is set at 20% above the land tax, which implies an artificial upper boundary at 1.2% of the land value. * Review present restrictions on foreign ownership and allow for more foreign participation. * Remove controls on land rents. 3 ISSUE STATUS OF REFORMS WORLD BANK PROPOSED *__ACTIONS/OUTSTANDING REFORMS NEEDED 3. Competitive Agroprocessing and Privatization of agroprocessing has nearly been completed. Internationally competitive agroprocessing and efficient Services for Agriculture, services for agriculture. * Companies are in the process of adapting to the market economy, but need significant levels of investment and are highly indebted. * Remove preferential treatments and open agro-industry to foreign capital investments. * Overcapacities in certain processing industries, e.g. dairy industry. * Foster the establishment of farmers' machine * In some cases, excellent commercial institutions, often with the cooperatives. participation of foreign firms, have emerged. * Facilitate the upgrading of agroprocessing to meet European Union standards in all sectors still lacking behind. 4. Rural Financing Banking system has been largely privatized. Sustainable rural financial services. * Rural financial markets need to be developed further. * Train staff in financial sector to address the banking and financial requirements of the agriculture sector. * Modem banking system is developing. * Train farmers in preparation of business plans and * Rural lending has originated almost entirely from budget financed credit proposals. credit fund at subsidized interest rates. * Support the emergence of private banking structure. * Lending to agriculture and rural sector has been low, but emphasis has been placed on increasing it. * Phase-out interest rate subsidies for rural lending. * Lack of an independent lending tradition based on risk assessment * Develop a rural guarantee fund to give partial guarantee and risk taking by banks. on rural loans on a fee basis. 4 ISSUE STATUS OF REFORMS WORLD BANK PROPOSED * ACTIONS/OUTSTANDING REFORMS NEEDED 5. Institutional Framework Adjustment of the institutional framework is at a fairly advanced Strategic framework for assistance to the rural sector. stage. * Accelerate technological transformation according to * Ministry of Agriculture has mainly regulatory functions. the needs of the private sector. * Development of agricultural extension services will receive public * Set up project related research funding system, and funding from the agricultural loan. demand oriented agricultural education. * Agricultural research and education is constrained by a shortage of * Focus on rural poverty and regional development. funds and lacks market responsiveness. * Improve public and develop private advisory services. * Food Quality Control do not yet meet international requirements except in few sectors. * Establish monitoring and testing capacities for food quality to meet EU standards. Agriculture Related ESW: WB Lending Proiects * Agriculture and Forestry Sector Review. (Grey Cover). 1995 Translated into Estonian in 1995. * Haapsalu and Matsalu Bays Environment Project USD 2m; Project effective * Agriculture Project; Expected Effectiveness Date: March 1997 USD 15.3m m:\csabalestonia.mt1 5 Table 1: Macroeconomic Indicators, 1992 - 1995 Indicator Units 1992 1993 1994 1995 Real change in GDP percent -22 -7 -3 3 GDP at current prices EEK million 13,100 21,918 31,228 40,461 Exchange rate (annual average) kroons/US$ 12.65 13.24 12.98 11.54 GDP in US$ US$ million 1,036 1,655 2,328 3,506 Consumer price index (annual average) percent 1076 90 48 29 Unemployment rate percent 1.9 4.7 5.1 5.4 Budget balance percent of GDP 1 1 3 1 Export growth (goods) in US$ terms percent n.a. 75 61 38 Import growth (goods) in US$terms percent n.a. 86 70 51 Current account percent of GDP 9 0 -6 -8 Source: OECD date base, Statistical Office of Estonia, Bank of Estonia, Country RepQr Estonia. Latvia. Lithuania. EIU, 1st quarter 1996. Table 2: Gross Agricultural Output (GAO) Index, 1986-96 (1986=100) GAO 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996* Total 97.4 93.8 100.9 87.7 84.2 68.4 63.1 57.0 52.9 52.3 Crops 88.8 74.4 96.6 72.6 77.7 66.1 73.3 63.1 56.7 .... Livestock 101.4 102.7 102.8 94.6 85.1 67.2 53.9 50.2 47.9 *Projection Source: Statistical Office of Estonia, Estonian Ministry of Agriculture. Table 3: Per Capita Consumption of Selected Food Products, 1986-95 Products Units 1986 1990 1992 1994 1995 Meat (total) kg/head 75 78 59 50 51 of which _ Pork kg/head 44 46 28 20 21 Poultry kg/head 9 9 5 3 4 Beef kg/head 21 22 25 26 25 Milk (total) litres/head 479 502 351 274 295 Butter kg/head 9 9 7 5 6 Cheese kg/head 5 6 5 4 5 Eggs pieces/head 304 290 224 218 224 Sugar kg/head 46 45 35 31 31 Cereal products kg/head 82 69 81 82 80 Fruits kg/head 56 36 25 26 28 Potatoes kg/head 118 98 99 125 120 Source: Statistical Office of Estonia, Estonian Ministry of Agriculture. Table 4: Foreign Trade in Estonia, 1992-96 (Million Kroons) EXPORT IMPORT BALANCE 1992 TOTAL 5548,6 5127,65 +420,95 of which: agricitural products (HS 1-24) 973,5 517,2 +456,3 share in total (%) 17,5 10,1 wood and articles of wood 611,3 48,0 +563,3 share in total (%) 11,0 0,9 1993 TOTAL 10636,2 11831,0 -1194,8 of which: agricultural products (HS 1-24) 2498,6 1741,0 +757,6 share in total (%) 22,1 15,9 wood and article of wood 2254,5 522,0 +2732,5 share in total (%) 13,3 2,4 1995 TOTAL 21039,9 29100,7 -8060,8 of which: agricultural products (HS 1-24) 3452,0 4,134,5 -682 share in total (%) 16,4 14,2 wood and articles of wood 3320,8 673,7 +2647,1 share in total (%) 15,8 2,3 1996 JANUARY-SEPTEMBER 17298,0 26039,6 -8741,6 of which: agricultural products (HS 1-24) 2780,2 4036,1 -1255,9 share in total (%) 16,1 15,5 wood and articles of wood 19949,8 406,9 +1542,9 share in total (%) 11,3 1,6 Source: Estonian Ministry of Agriculture. Table 5: Crop Production in Estonia (thousand tonnes) Production 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996* Total grain 915 904 447 967 958 939 599 811 511 460 675 of which: Wheat 67 50 19 44 64 62 89 106 57 63 111 Rye 122 118 97 162 178 127 153 123 41 50 60 Barley 611 654 304 684 600 623 301 477 339 282 331 Oats 71 56 18 58 93 107 44 85 58 51 ... Sugarbeet 0.0 0.0 0.0 0.0 0.0 0.6 8.3 5.0 10.6 15 ... Oilseeds 0.0 0.0 0.0 0.3 0.0 1.1 2.3 1.7 4.2 5.5 ... Potatoes 1146 728 716 864 618 592 669 539 563 551 446 *Preliminary Source: Estonian Ministry of Agriculture, Agriculture 1994, Statistical Office of Estonia, Tallinn 1995. Table 6: Yields of Main Agricultural Products in Estonia, :1986-95 Units 1986 1991 1992 1993 1994 1995 1996* Wheat t/ha 2.4 2.6 2.1 2.1 1.7 1.9 2.5 Rye t/ha 2.3 2.2 2.6 2.0 1.9 1.8 2.3 Barley t/ha 2.2 2.2 1.1 2.2 1.6 1.5 2.3 Potatoes t/ha 18.9 11.3 14.5 12.6 14.1 14.9 13.9 Cows (milk yield) t/animal 4.2 4.0 3.5 3.3 3.5 3.5 2.9 *Preliminary Source: Estonian Ministry of Agriculture, Agriculture 1994, Statistical Office of Estonia, Tallinn. Table 7: Livestock Sector in Estonia Units 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996**/ Cattle '000 840 828 821 819 806 758 708 615 463 419 379 head of which: cows '000 303 304 303 301 294 281 264 253 277 191 182 Pigs '000 1074 1100 1084 1099 1080 960 799 541 424 421 367 Sheep '000 148 136 136 135 140 139 142 123 83 85 72 Poultry '000 6912 6906 6776 6897 6923 6537 5538 3418 3226 3400 2977 Milk million 1267 1290 1289 1277 1208 1093 919 807 772 706 produc- litres tion Source: Statistical Office of Estonia, Tallin, 1996. *L On December 31,1995. .*/ On September 30, 1996. Table 8: Estonian Woodlands Resources and Dominant Tree Species in 1996 Dominant Forest Area Total Volume of Annual Increment species Growing Stock Thous.ha % of total mill.m3 % mill.m3 % Pine 726.3 38.1 109.8 39.6 3.04 33.7 Spruce 457.6 24.0 71.1 25.6 2.38 26.4 . Birch 567.4 29.7 73.5 26.5 2.64 29.2 Aspen 29.6 1.6 6.0 2.2 0.18 2.0 Gray alder 78.5 4.1 10.5 3.8 0.58 6.4 Other 48.3 2.5 6.5 2.3 0.21 2.3 Total 1907.7 100.0 277.4 100.0 9.03 100.0 Source: Statistical Office of Estonia Table 9: Annual Maximum'Volume of Wood Harvest in Estonian Forests (million m3) Felled stock State Forests -Private Forests Total Clearings 2.70 2.35 5.05 Thinning 0.94 1.25 2.19 Other 0.15 0.42 0.57 Total 3.79 4.02 7.81 Source: Statistical Office of Estonia. Table 10: List of Laws with Special Relevance to the Transformation of Agriculture 1989 December 6 Law on Peasant Farming * 1990 September 26 Law on Rent 1991 June 13 Law on Principles of Property Reform October 17 Law on Land Reform December 5 Law on Simplied Proof of Illegality of Alienation of Property 1992 March I1I Law on Agricultural Reform June Law on Land Leasing June I11 Law on Dates of Application for Restitution and Compensation of Illegally ____________Alienated Property 1993 January 13 Law on Extension of Restitution of Buildings and Establishments in Rural Areas to the Sisters and Brothers of Previous Owners and their Heirs February Law on Determination of the Value and Compensation of Illegally Alienated Property May 6 Law on Privatization of Housing Facilities June 2 Law on Set-up of Local Government June 9 Law on Real Estate June 17 Law on Privatization ___June 15 Law on Land Register ____October 20 Law on Foresting ____October 27 Law on Implementation of Real Estate May 6 Law on Land Tax December 16 Law on Tax Arrangements 194 February 9 Law on Land Valuation October 12 Law on Land Cadaster January 25 Law on Land Registration *The most important laws in the Estonian agricultural reform process are in bold. Source: The Estonian Ministry of Agriculture. Table 11: Contribution of Different Types of Farms to Agricultural Production, 1995 (percentage) Type of farms Use of agri- Total Use of Livestock Crop cultural land Production Cultivated Production Production Land Farming enterprises: corporate 30 51 48 farms, state farms and co-operative: Family farms 24 17 29 Household plots 18 32 23 Uncultivated 28 -- Total 100 100 100 Source: Agriculture 1995 Statistical Office of Estonia, Tallin, Table 12: Development of Family Farming */ in Estonia, 1991-96 1991 1992 1993 1994 1995 1996 Number of farms 2300 7000 8400 10200 13500 19767 Average size in ha 27 25 25 25 23 21 Yearly increase in number 4700 1400 1800 3300 6267 5 00**/ Source: Statistical Office of Estonia. */ Only private family farms are included, not household plots. **/ Estimate. Table 13: Size of Private Farms, January 1,1996 Number of Farms Size/ha 1992 1993 1994 1995 1996 0-5 576 659 818 1634 3490 5.1-10 894 1040 1298 1827 2898 20.1 -30 1499 1804 2191 2721 3574 30.1-50 1511 1811 2090 2488 3175 50.1-100 631 784 879 1027 1273 Over 100 37 45 54 66 85 Total 7029 8412 10153 13513 19767 Average 25.1 25.4 24.8 23.1 20.8 area/farms Source: Statistical Office of Estonia. Table 14: Distribution of Forest Land by Ownership Category (1995) (thousand hectares) Country State Forest Private Farms Other Private Agricultural Other Total Districts Producers total land forest total land forest total land forest land total land forest land total land forest land area land area area land area area area area area area area Harju 166,9 119,8 23,4 8,5 196,0 64,2 47,0 12,7 433,3 205,2 Hiiu 53,3 44,0 5,1 2,8 42,6 17,9 1,3 0,1 102,3 64,8 Ida-Viru 195,5 136,3 13,2 6,8 97,6 33,5 30,1 0,0 336,4 176,6 J6geva 88,8 67,6 25,2 9,6 142,2 41,3 4,2 0,l 260,4 118,6 Jirva 83,6 61,4 22,1 8,5 144,2 41,9 12,4 4,1 262,3 115,9 Liiine 76,6 44,8 13,5 5,3 140,0 41,0 8,2 1,0 238,3 92,1 LiAne-Viru 110,0 91,1 36,6 14,3 188,0 57,5 11,9 0,4 346,5 16,3 Pblva 62,9 48,8 46,0 17,5 103,6 30,3 4,0 0,2 216,5 96,8 Pimu 216,5 145,4 32,9 12,5 216,6 72,3 14,6 0,6 480,6 230,8 Raapla 110,6 78,7 34,2 13,8 148,2 48,2 5,0 0,4 298,0 141,1 Saare 80,2 61,7 13,1 5,0 187,4 62,0 11,5 2,6 292,2 131,3 Tartu 89,5 59,5 51,7 14,7 144,0 32,9 23,8 0,4 309,0 107,5 Valga 69,3 59,0 27,0 11,4 102,0 34,1 6,4 0,6 204,7 105,1 Viljandi 114,9 79,0 38,9 16,9 179,8 60,4 25,3 0,4 358,9 156,7 Vru 64,7 53,1 29,0 11,8 131,5 44,7 5,3 0,1 230,5 109,7 Total 1583,3 1150,2 411,9 159,4 2163,7 682,2 211,0 23,7 4369,9 2015,5 Source: Statistical Office of Estonia. Table 15: Average Retail Prices of Selected Products October 1996 (USD per kilogram) Latvia Lithuania Estonia Beef (I category) 2.72 2.58 2.52 Pork (I Category) 3.07 3.40 3.09 Chicken (1 Category) 2.60 2.3.4 3.01 Sauage/Boiled (I Category) 3.98 3.34 3.20 Butter 3.56 3.01 3.38 Milk, Fat Content 2.5%, 1 Litre 0.45 0.38 0.45 Sour Cream 1.65 1.96 1.58 Curd 1.52 1.65 1.94 Eggs (10) 1.09 0.89 1.07 Rye Bread 0.72 0.47 0.69 Rolls (High Grade Wheat Flour) 0.98 0.69 1.09 Sugar 0.87 0.85 0.67 Potatoes 0.18 0.14 0.21 Vodka, Plain, I Litre 6.80 6.03 7.98 Electricity (Kwh) 0.06 0.04 0.03 Minimum Wage, Sept. 1996 69.12 75.81 56.20 Average Old-Age Pensions. (III 1996) 70.54 49.14 80.63 Source: The Baltic Times, No.39, October - November 1996 based on Latvia Statistical Office Information. Table 16: Budgetary Expenditures Associated with Agro-food Policies in Estonia (million roubles in 1986-91; million kroons in 1992-95) Expenditure on 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1. Direct payments 23.8 28.3 82.6 88.9 114.3 102.2 50.8 2.4 0 0 2. Reduction of input 40.8 77.7 21.9 41.1 18.6 32.1 39.3 21.2 22.6 24.3 costs 3. General services 51.3 49.5 49.1 53.1 50.5 93.8 90.6 144.3 160.4 222.2 4. Consumer subsidies 675.1 668.9 630.6 672.6 691.2 85.6 48.3 0 0 01 5. Social measures 6.2 6.8 7.9 0 6.9 15.6 0 0 0 0 6. ARLCF 0 0 0 0 0 0 0 125.4 83.1 100.0 7. Grain Board 0 0 0 0 0 0 0 40.0 35.4 20.0 8. Land Board 0 0 0 0 0 0 7.2 31.4 49.0 48.7 9. Other 52.6 21 41.2 65 42.1 14.1 14.3 10.5 22.7 22.6 10. Total Agro-food 849.8 852.2. 833.3 920.7 923.6 343.4 250.5 376.9 373.2 437.8 Expenditure I I I I 11. Total million US$ 1231.6 1352.7 1388.8 1461.4 1592.4 197.4 19.8 28.5 28.8 37.9 Source: OECD, 1996. Table 17: Allocation of Annual Budget of Ministry of Agriculture 1995/97 (thousands of kroons) 1997 1996 1995 total 1997/96 draft budget report % 01 Ministry of Agriculture 14936,4 10171,9 8090,0 4764,5 146.8 11 National Land Amelioration Services 30,040,0 37,309,1 25672,0 -7269,1 -19,5 14 State Research Institutes 2102,1 -- -- 2102,1 -- 15 Janada Education and Advisory Center 5628,1 5113,8 3713,0 514,3 110,0 16 Agricultural Technical Schools 43,466,4 39,511,5 33,833,2 3954,9 110,0 17 Agricultural University -- -- 37,359,0 -- -- 19 Teaching Methodology Center 604,5 494,5 437,0 110,0 122,2 21 Museums of Agriculture 3936,5 3437,3 2770,0 499,2 114,5 35 Restoration of Settled Areas -- -- 25000,0 -- -- 41 National Reserve of Dairy and Meat Products -- -- 5040,0 -- -- 42 National Reserve of Grain Seed 2000,0 3000,0 1500,0 -1000,0 -33,3 43 National Reserve of Grain for Human 28721,0 26110,0 -- 2611,0 110, Consumption 51 National Development Program for Cereal 9970,0 9630,0 8014,0 340,0 103,5 Production 54 Other National Programmes 14759,0 9830,0 5900,0 4939,0 150,2 61 Development of Farms 11533,0 6730,0 7363,0 4803,0 171,4 70 National Veterinary and Food Inspectorate 30267,7 -- -- 30267,7 -- 71 Veterinary Board -- 6303,7 3797,0 -6303,7 -- 72 Veterinary Institutions -- 20662,6 20561,0 -20662,6 -- 73 Veterinary and Food Laboratory 11827,5 -- -- 11827,5 -- 75 Plant Protection Inspectorate -- 6115,8 5394,0 -6115,8 -- 76 Plant Production 13680,6 -- -- 13680,6 -- 77 Vegetative Material Control Laboratory 6220,9 -- -- 6220,9 -- 81 Annimal Breeding Inspectorate 14977,0 13342,7 12134,0 1634,3 112,2 82 Plant Quarantine Inspectorate -- 3132,1 2259,0 -3132,1 -- 83 Seed and Plant Variety Inspectorate -- 8525,1 7707,0 -8525,1 -- 84 Chamber of Agriculture and Commerce 1000,0 1000,0 -- -- 100,0 97 Area of Government of Ministry of Agriculture: 49170,0 44458,8 47200,4 4711,2 110,6 Investments 98 Area of Government of MOA: other investments 6455,0 5166,0 5328,1 1289,0 124,9 TOTAL 301305,7 260044,9 259071,7 41260,8 L 11 5 Source: Estonian Ministry of Agriculture Table 18: Investment Plan of Ministry of Agriculture, 1997/98 (Current Kroons) Site Total Cost Previous 1997 1998 Allocation Construction 1. Suuremoisa Technical School study 1928000 928000 500000 500000 building 2,Kuremaa Agricultural Technical School, 1030000 530000 500000 -- workshop 3. Vana-Voidu Higher Agricultural School, 1940000 1470000 470000 -- dairy cattle shed 4. State drainage support for farms 127500000 70470000 7000000 50030000 '5.Jogeve Veterinary Center, Building 2118000 1416000 500000 202000 Capital Investments 1. Drainage rehabiltation 149510000 6120000 6000000 42640000 2. Power lines and communications systems 65747000 21747000 11000000 33000000 in rural areas reconstruction 3. Museums 4. Research and learning institutions 3412000 1262000 350000 1800000 5. Other budgetary institutions 34841000 9223000 3990000 21628000 6. Ministry of Agriculture, building 13810000 5240000 8570000 -- 7. Land Amelioration Bureaus, buildings 5924000 2154000 900000 2870000 and equipment 8. Drainage for state companies and 2650000 21181000 700000 4619000 budgetary institutions 9. State maintained water pipelines 30300000 15468000 2470000 12362000 10. Regional infrastructure, development 25000000 14208000 2000000 8792000 Purchases 1. Research and learning institutions 11900000 1563000 2000000 8337000 2. Food labs, upgrading to EU requirements 24700000 3500000 1135000 5585000 3. Land Amelioration Bureaus 2400000 400000 500000 1500000 .4. Car leasing payments 257000 108000 85000 64000 Construction Captial Investment Purchases 1997 draft 8,970,000 36,480,000 3,720,000 1996 budget 15,000,000 23,518,000 5,940,800 1995 report 31,100,000 14,900,000 1,200,000 Source: Estonian Ministry of Agriculture OTHER REPORTS IN THIS SERIES INCLUDE: EC4NR Agriculture Policy Note #1: Armenia Agriculture Policy Update - December 1995 EC4NR Agriculture Policy Note #2: Land Registration and Land Titling Projects in ECA Countries - May 1996 EC4NR Agriculture Policy Note #3: Latvia Agriculture Policy Update - July 1996 EC4NR Agriculture Policy Note #4: Current Status ofAgricultural Reforms in EC4 Countries - July 1996 EC4NR Agriculture Policy Note #5: Moldova Agriculture Policy Update - September 1996 EC4NR Agriculture Policy Note #6: Land Reform and Private Farms in Georgia: 1996 Status - October 1996 EC4NR Agriculture Policy Note #7: With Farmer's Eyes: A Grassroots Perspective on Land Privatization in Moldova - October 1996 EC4NR Agriculture Policy Note #8: Land Reform and Private Farms in Armenia: 1996 Status - December 1996 EC4NR Agriculture Policy Note #9: Land Reform and Private Farming in Moldova - January 1997 Additional copies of this report and the policy notes listed above can be obtained from Ms. Phyllis Harrison at extension 32189.