Agriculture and German reunification

This report examines the general course taken by agricultural reforms in East Germany, which provides the only example in the region in which agricultural output did not decline during radical adjustment. The authors found that total agricultural production remained roughly constant over the period, and the productivity of land and labor in agriculture increased markedly in four years. East Germany's transformation is unique, presenting a view of the nature and speed of agricultural adjustment when features of the economic environment external to the sector do not impede the process. Structural change was rapid, and productivity in the East increased to equal or surpass that in West Germany in five years. The rapid adjustment required enormous transitional payments for severance, social security, farm investment, relocation, and retirement of marginal land. Agriculture's adjustment consisted of changes in farm structure, asset ownership, production technology, and output composition. Lease rather than sale of land dominated activity on East German land markets. Leasing provided needed flexibility for farm size adjustments, as well as lower start-up costs for new farms. An open trading regime contributed to importing new technology and a rapid rise in yields. But, employment in agriculture declined by about 80 percent in the five years after reunification, and the exit of labor continues. Further, capital subsidies provided as transitional assistance have exacerbated labor outflow. The approach to valuation and distribution of farm assets led to concentrating the value of assets in the hands of a relatively small number of people. Finally, the Common Agricultural Policy reform comprised a tremendous gain for Eastern German agriculture at a time when large areas would most likely have been idled anyway, even without the payments.