* The present and the future of the Hungarian agriculture.

International Young Leaders Network, Study Week in Budapest 5-10 July 2009

Sapientia University Budapest V Piarista köz 1.

The present and the future of the Hungarian agriculture.

Drs. J.D. Gábor

It is for me a great honour to be the next speaker, right after professor Róna, whom I regard as one of the few people in Hungary who really know the actual situation and also have a realistic and consistent view about the measures which should be taken in the agricultural field to  become prosperous once again.

You might wonder why I, a former Dutch politician, are addressing you on the subject of Hungarian agriculture.

Well, I was born in this country, and left during the Russian invasion in 1956 as a young boy of 16 years. I went to the Netherlands, where I studied economics and international relations at the catholic university of Tilburg.

Later  I got involved in Dutch politics, first as a city councillor, then as mayor of a mediumsized town, followed by the membership of the parliament and finally member of the government as state secretary for agriculture  and nature magement.

In 1998 I was offered the position of agricultural attaché at the Dutch embassy in Budapest.  One of the reasons was that I still spoke Hungarian fluently, which was an asset at the time when the negotiations about Hungary’s membership of the European Union took place. I stayed until my retirement in 2005. About my experiences in these 7 years I wrote a book with the title : ” Hungary half way in Europe”.

During my stay in Hungary I had many times the opportunity to host and guide people throughout the country. All of them, without any exception, were pleasantly suprised by its beauty, and wondered where this country got the means in the past to create such beautiful streets as, for instance, the  Andrassy út in Budapest. They thought the beauty of this town mesmerising.

Maybe you ask yourself the same question.

The answer is as follows: In 1867 the „ kiegyezés” took place, a historical compromise  between the emperor of Austria and the Hungarian nation. The so-called double monarchy was created, through the coronation of the emperor of Austria as king of Hungary, which the Hungarian noblemen had refused for 20 years. Then a period of 40 years of tremendous vitalisation of the Hungarian economy started. This was mainly financed by the great landowners, read: agriculture.

At that time Hungary became one of the leading European agricultural producers and exporters of grain, maize, meat and wine on the continent.

To give you an idea: only the United States had a bigger production of maize than Hungary.

So the secret of this successful development and the recovery of the Hungarian nation at the end of the XIX century was agriculture. A combination of a wonderful climate, the quality of the soil, well organised and hard working people and good salesmanship.

Maybe it will suprise you, but at the time of the political change, 20 years ago, the situation was the same. Agriculture was again leading. In 1989 Hungary was the only country of the 7  new central european candidate  menberstates to the European Union, including the Baltic states, with a substatial agricultural  export profit. The agricultural balance of payment showed a  yearly 1 to 2 billion euro surplus.

At the time the agriculture was organised on large scale production, and technological improvements from the United States had been implemented.

Let me give you some figures concerning the production :

1990               2007

Number of cattle:                                      1.571.000         702.000

Number of milk cows:                                 630.000          325.000

Milk production in million liters:              2.763.000       1.850.000

Number of pigs:                                        8.000.000       3.871.000

Poultry:                                                   31.121.000     38.281.000

Grain production in tons:                        12.561.000     15.000.000*

Fruit production in tons                            1.500.000        1.000.000

Vegetabels in tons                                     1.644.000        2.000.000

Labor in the agriculture                                693.000           459.291

Contribution to the GDP                                    8%                3.6%

Grape in tons                                               862.974           540.072

* average of the year production of 2005 and 2006

Let us now look at the present situation:

The number of cattle, milk cows and pigs declined by half. The milk, fruit and grape production diminished to two thirds. Only the vegetable, poultry and grain production increased substantially.

It is not difficult to conclude that the situation in the last 20 years shows a dramatic change for the worse. Nevertheless, I still regard the Hungarian agriculture as one of the three possibilities for a prosperous Hungarian economy in the future.

Let me elaborate a bit on the reasons for the dramatic decline of the Hungarian agriculture.

In my opinion there are three reasons on the Hungarian side:

  1. Lack of strategy and lack of a national consensus on how to handle the transformation from the post communist agricultural structure to a market economy. This situation unfortunately still exists in our days!
  2. Bad strategy and tactics during the years of negotiations with the European Union.
  3. Bureaucratic and complicated introduction of the european agricultural rules and institutions.

However, not only the Hungarians can be blamed. There are also failures on the EU side.

We in the EU did not realise the complexity of the situation of  how to change from state capitalism to a market oriented private system in a way which was acceptable for both sides.

As a result we flooded the domestic market with our products,  even if  our products were more expensive, thanks to sofisticated logistic networks, superchains, and capital.

Hungary had no chance to organise the proces in an acceptable way. First the capital market, which was our strongest weapon, was  liberalised. Hungary had no capital at all in 1989.  The old EU members took over 70% of the hungarian industrial production, including the agriculture related industries, such as, for instance, the canning industry.

Much later, free trade was introduced for the Hungarian agricultural products, which then had to compete with the heavily subsidised European products. They lost this battle too, on the internal market of Hungary.

You probably know that the labourmarket is still not completely liberalised for citizens from the Central European countries, in contrast with Western European citizens who have been allowed to work  in  entire Central Europe from the beginning of the change in 1989.

I call this a fundamental unbalance in modern European history  between Central and Western Europe.  It will have consequences for the future, because it will give opportunities for  strengthening  wrong nationalistic feelings and anti european sentiments. A missed opportunity to create a balance on our continent in the long run.

I want to say a little more about the three main reasons for the deplorable state of the hungarian agriculture.

  1. Lack of strategy and lack of consensus on how to handle the transformation of the post communist agricultural structure to a market  economy.

During the communist time the collectivisation of agricultural land was forced with barbarous methods.

The farmers were forced to become workers in the so-called kolchozes or cooperations under leadership of the communist party. They had to work on the nationalised state owned land in  their villages. The large scale production, combined with the low costs of labour and relatively modern technology introduced at the end of the nineteensixties  resulted in  a high production and a great contribution to Hungary’s national economy.

The cooperations were also in charge of the schools, the cultural life  , sports and youth activities in the villages.  Actually decided almost everything that happened in the rural communities.

So this institution played a very important role in everyday life in the  rural communities.

In 1989 the system collapsed completely.

I can understand that the peasants wanted their land back  in 1989, and that the political leaders of the first government after the political change followed this wish. At the time I was consulted and I advised a different approach.

The reprivatisation took place by public sale. The former land owners were  compensated with so-called vouchers. They participated in  public sales with the vouchers that entitled them to buy as uch land as they had vouchers for. Over 1 million people got very small parcels of land in many different places. This method caused  a tremendous fragmentation of agricultural land. An unforgivable failure of the political élite!

Unfortunately, nobody understood that going back from the large scale production and the use of large machinery  to a family type of production without the western european  structure of cooperations in sale and marketing activities does not work.

The second government was under the leadership of the former communist party and favorised again  large scale production.

The third government forced again the family type production and reduced the land ownership to a maximum of 300 hectares per person.

The fourth and all following governments tried to favorise the bigger,  so-called red agro barons ( mostly the former communist leaders of the cooperations during th communist era), who had managed to secure larger areas in the privatisation period at the beginning.

This ever changing practice  of the various governments comes back in the continuously changing attitude of the Hungarians towards the european  regulations, with the conseqence that in the end nobody knows how to use the european possibilities. Billions of euros are waiting in Brussels to be spend in Hungary, but there are no real possibilities for application.

  1. Bad strategy and tactics during the negotiation years with the European Union.

When Hungary applied for membership and the negotiations were started, the idea was that each country would be judged individually to see whether and when it would be ready to join the European Union.

This was also the opinion of the Union.

Hungary wanted to be the first former Comecon country to join the EU, and therefore negotiated very quickly. In the beginning this was a very successful strategy. Many chapters of the negotiations could be closed .

In the meantime, it was by now  around the year 2000, it became obvious, that the Union changed strategy.

Not an individual  and quick membership for one or two new states was the aim, but as the German chancellor said „no membership without Poland”. It meant all together. No speed was necessary anymore.

That meant of course a different approach. However, the Hungarians did not understand the changed situation and continued their strategy of quick negotiations, including the agricultural chapters. That meant a very high price to be paid, doing great concessions and losing positions.

At the final stage the Hungarians got the message and managed to  negotiate successfully concerning the reference year for the subsidies. As a result the Union accepted 2001 as  reference year, for Hungary an extremely good production year. It meant 105 million euro more subsidy per year for the country than the Union originally intended. However, in the whole package it was a small success.

A second aspect of the negotiations was the misunderstanding on the Hungarian side that they thought that they would get exacly the same financial support from the Union from the day they became a member as the old memberstates. However, Hungary got finally only 25% of the hitherto usual financial support for the personal income  support of the farmers. This caused  great disappointment in the rural areas and is still considered a big shame by Hungarian public opinion.

By the way, Slovenia also a new memberstate, managed to get right from the beginning the full 100% individual support for the farmers! But they had a different and very effective strategy of negotiation!

Hungary failed to work out a clever strategy  for the structural change of collective agricultural production to a market economy. In 1998 the Union was not against reservation of the full amount, so the full 100%                in a structural fund, provided that the money would not be given to the individual farmers as income support, but would be used for projects to effect the necessary structural change: to build up logistic support for the marketing, to improve the  quality of the machinery through modernisation, to improve the roadstructure, to organise cooperations for sale and for research. But Hungary did not ask that kind of support. Only the 100% personal income demand  was on the table.

3.Bureaucratic and complicated introduction of the European agricultural rules and institutions.

To estabilish the national institutions for the agricultural and rural payments and developments took much more time than expected, so there is a backlag of payments of about 2 years.

To submit a successfull application for European financial funds is a very difficult and time-consuming matter.  Hungary has created a very large and bureaucratic organisation. The responsible people are usually badly informed about the procedures. Sometimes they do not open the tender, because they are not able to handle the amount of applications. The specific hungarian implementation of the general european rules is often more complicated than the european regulations ask for. To illustrate this, a recent study emphasised that in Hungary de costs of administration is 6,8% of the GDP, compared with a  european  average of 3,5%. You see it is double so high!

In  the year 2000,  I was invited to a meeting of the 35  most important agricultural managers in the country to give my opinion about an action plan to vitalise the hungarian agriculture.

I asked them to close their eyes and dream with me. In our dream we were quoting the imaginery annual report of the European Commission on the Hungarian agriculture in the year 2010. So, 10 years later, almost the present time.

 

I want to quote this immaginery report again, because it illustrates the potentions of the country if they had followed the right policy. Wich they did not.

I quote:

„ From the new memberstates Hungary is the most successful country in developing its agricultural potentions. The number of pigs rise from the moment of joining the european community from 5,5 million to 8 million. The country is exporting a stable amount of pork and is now with the Netherlands and Denmark the most important pig breeding country of the union. They reached this result by introducing new genetic material of pigs, diminishing the labour volume, introducing  big scale modern productionchains and finding the way to the european market with joint ventures with other european companies.

 

The shortage of investment capital was solved by organizing the free land market, which stimulated the inflow of  foreign capital.

After lifting the ban of landownership for foreigners,  a real price of the land market was developed. The combat againt land speculation was successful by introducing a payment system in a national agricultural fund. The amount that must be paid is the difference between the market price and the actual price at the moment of entering the union.

A new landconsolidation act makes it  possible that small parcels of land can be combined for an economically profitable production.

A new law concerning the renting of the land secured  the position of  the people who cultivate the land so they can really get an economic production.

Following the Spanish example the greenery sector  was strongly developed. So that Hungary is now supplying good quality fruit and vegetables in the whole of Europe.

The poultry sector has become an export sector thanks to a substantial rationalisation process.

Hungary successfully reduced its agricultural land from 5, 6 million hectares to 4,6 ha in favour of a great reforestation program and tackled the water shortage problem.

I said in 2000 that  Hungary’s agricultural production was in the 12th  place on the list of the menber states, but the real goal should have been the 8th place.

After my illustration of the past and the present misery of the Hungarian agriculture you are of course interested in ideas to make thing better.

Is there any hope?

Could agriculture contribute to the national welfare?

The answer is definitely yes.

But  what should be done to optimalise and use the potentions of the hungarian agriculture as one of the three hungarian treasures.

First of all Hungary has to decide what is the aim of the agricultural policy:

  1. Only produce primary agricultural bulk products and buy the sofisticated foreign goods with substantial added value.
  2. To develop the country according to its agricultural potentials.

If the decision is A nothing has to happen.

If the aim is to use potentials, a lot of things have to happen.

I will list 10 priorities.

In preparation for my speech today I read a very recent unpublished report from the Hungarian Agricultural Research Institute. I was surprised by the honest and selfcritical approach and the clear opinion about the state of the agriculture and the possibilities.

I am afraid this report will never be published.

What I read confirmed my opinion and the views I have these last 10 years.

The conclusions of the report are 95% the same as mine.

Let me mention the 10 priorities:

  1. modernisation of the stucture of properties

In 1990 :5,6 million hectares went over to the ownership of 2,6 million private persons.

The compensation land fund was 2,1 million hectares in 1 million land parcels. For the compensation 760.000 persons acquired land property with an average of 2,8 hectares.

Out of the 3,5 million hectares allocated for the purpose of redistributing the former co-operative share 1,8 million owners were given 1,9 hectares each as an average.

A specific consequence  of the land privatisation is the undivided property of about 1,5 million hectares.

A landconsolidation law is needed to create the optimal size of the production units.At the moment 50% of production land is segmented in small tiny parcels and distributed to one million owners. In this way they can not play a role in the economic competition. This means a substantial loss in terms of production and in terms of quality.

A new law on the lease of the land is also nessecery. This law should give security to both sides, the owner en the lessee. Long term leases are preferable and the rent payment must be limited to a maximum of 2% of the value of the land per year.

  1. The agriculture needs a substantial capital injection. This is impossible without the liberalisation of the land market. So the ban of land ownership for foreigners and for companies has to be lifted.

Also the limitation of land ownership of hungarian private persons to 300 hectares has to be eliminated. As a result of these measures the land wil become  really valuable. Banks will consider land as a valuable object en will provide the capital for modernisation. International companies will become interested in participating in the modernisation of pig breeding and milk farms!

At the moment you can buy land if you are a Hungarian citizen to a maximum of 300 hectars for 2.000 to 4.000  euro per hectare. It means that the value of land in terms of economy is worthless.  In the Netherlands you have to pay 80.000 to 100.000 euro per ha.

3. Great attention has to be paid to the social coherence in the small communities and villages, otherwise the rural areas will die. It is a misunderstanding that this is part of the agricultural policy. On the contary! This is social and community policy, and it certainly does not disturb the agricultural market, as some people are saying. The European Union has a great spectrum of sensible measures to promote and support the rural policy of the member states. Hungary should make an effort to work out a model which would be best for the special hungarian situation.

4. The Hungarian agricultural bureaucracy has to be reorganised fundamentally.

Less institutions, shorter lines, quick decisions, a clear information system, and an atmosfere of trust and reliability. The traditional Hungarian administration which is super legalistic and top down oriented has to be changed to bottom up, more in consistency with the real circumstances.

 

  1. Large scale stimulation of cooperations of producers in the fruit and vegetable sector to sell their products. This sector is the most promissing and has great potentions. Individually, the growers always loose the price negotiations with the supermarkets, which dictate the price level. In sales cooperations they can get a real price for their quality products. Only 15% of the fruit and vegetable producers are cooperating in sale combinations. In the Netherlands it is 65%. The organisation degree has to be at least 50%.

 

  1. At least 1 million hectares has to be converted into forest and nature conservation area. The quality of this land is in the long run not suitable for agricultural production. Another advantage is that this would create a lot of jobs. The European Union could play a substantial role in this process.

 

  1. The hungaricums, such as salami and Tokaj wine, which are typical hungarian agricultural products with unique qualities should be given special attention with regard to international marketing.

In the communist time the state bought all the agricultural products. So the attitude of the producers is traditionally production minded. In our time a producer needs a market orientation wich is completely different. Marketing and promotion need expertise and a mentality the Hungarians have not yet acquired.

 

  1. Research and agricultural education must be changed in the direction of applied technology in stead off theoretical highlights. 1% of the GDP for innovation is not enough. It has to be at least 2%.

 

  1. In our climate changing world, irrigation becomes a top priority in the agricultural production. 90% of the agricultural land in Hungary suffers from drought in a dry period . Usually 4 times in 10 years.  Hungary permits  by law only 204.000 hectares to be irrigated. In fact only 87.000 hectares is irrigated with an old fashioned system. This puts Hungary in the 26th place on the list of the 27 menber states in Europe. For a successful development at least 10% of the national production area should be irrigated. This is 10 times more than the actual practice at the moment. A great irrigation program is needed. Such a program could create more than 100.000  new jobs!

10. An interdependent program to tackle the black market, corruption  and tax reduction is necessary. The black market in Hungary comprises 20-30 % of the total market. In Europe 7-8%.

Corruption is enormous. For instance,  when you want to get a tender, you have to pay at least 10% of the amount of the tender to the issuing party. Many employees earn  minimum wages in the official administration, but they get more than double black in the envelope.

With this in mind you can understand why taxations are high. The average income  for employees in the agriculture is  21.000 euro. The cost of labour, including taxation, is 54% of these 21.000 euro.  It has to be lowered by 6-8 % to come closer to the european average.

Well,  if Hungary is willing to realise this 10 point program in the next 12 years, it will become one of the leading agricultural economies of Europe again, as it was in the second half of the XIX century and at the time of the political change in 1989!

If you want to have an realistic picture of the future you have to consider that:

  1. the Hungarian society is not open for suggestions from outside.
  2. the country still lives in a general atmosfere of mistrusting eachother.
  3. there is a total lack of consensus about which policy should be followed.
  4. there is no common interpretation of the past; the country is divided into two parties of more or less equal size: the postcommunists and the civil society supporters. Both with strong roots and a behavior like in the old communist time.

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