The case for foreign ownership of farmland in Poland.

• Author: Dadak, Casimir

The present law on land ownership in Poland has been in force since 1920. This law allows foreign interests to buy only small parcels. Larger plots can be acquired only with permission from the Ministry of Interior, which needs to consult every such decision with the Ministry of Agriculture. Consequently, this regulation makes foreign purchases of farmland very difficult. The accession agreement between Poland and the European Union (EU) allows for the preservation of the existing limitation for another 12 years.

The justification for the exclusion of this particular asset from the EU laws protecting free movement of labor and capital within the Union's boundaries is its alleged low price. According to the popular view held in Poland, local farmland is very cheap and it will take about 15 to 20 years for the price of this resource to approach the average EU level. Successive Polish governments have shared this opinion for many years. Indeed, the average price of farmland in the EU is 7.5 times higher than the average price of this asset in Poland. However, the difference varies greatly: farmland is 30 times more expensive in the Netherlands, 10 times more clear in western parts of Germany, but only twice as costly in former East Germany.

The purpose of this article is to show that there is no good justification for this prohibition either on economic or equity grounds and that the Polish economy suffers as a result of this restriction. Agriculture is a very important industry, but this sector has greatly underperformed the rest of the economy since 1989. Foreign participation in farm ownership is a quick and easy way to increase the price of farmland and to reinvigorate this industry.

Agriculture and the Polish Economy

Agriculture is still a vital sector of the Polish economy and a large segment of Polish society depends on this industry. The data in Table 1 point to a substantial decline in agricultural production over the period 1990-2002. As a result, the share of agriculture in the GDP declined precipitously. Table 1 also points to a considerable drop in the standard of living of all those who are professionally active in this sector. Clearly, the post-communist transformation failed to bring about positive changes in Polish agriculture.

Ironically, under communism agriculture was the only key industry with a majority of assets privately owned. Unlike other sectors that were subject to rigid central planning, agriculture possessed a large number of people accustomed to risk-taking and familiar with the workings of the market mechanism. Hence, at least in theory, this sector should have led the economic revival rather than trailed it.

Macours and Swinnen (2000a) note that economic reforms and rapid growth in China and Vietnam were preceded by reforms in agriculture. They also report that in Albania, following the demise of communism, gross agricultural output "has grown more than 10 percent annually on average" (p. 173) for the first four years. Moreover, they find that the only factor that had a positive influence on agricultural output in Central and Eastern European Countries (CEECs) is restructuring of the industry.

The shift to individual farming is estimated to have a very strong positive effect on total output. However, the disruption associated with this process substantially decreased the overall impact of the movement toward individual farming. Since individual farming in Poland was prevalent even under communism, the disruptive effects were not present. Nevertheless, unlike in Albania, or earlier in China, agricultural output in Poland fell considerably. However, after the fall of communism, Polish agriculture was to some extent sheltered from international competition. In particular, the restriction on foreign ownership of land prevented the restructuring of the agrarian structure and has hindered the process of transformation of agriculture.

Adjustment Process

Calculations concerning the speed at which prices of farmland in Poland might catch up to those prevailing in the EU are based on the assumption that the Polish market is closed to foreign buyers. If foreign participation were allowed, prices would rise as demand for farmland increased. The magnitude of the increase, of course, depends on the price elasticity of supply. Usually the supply of unimproved land (and farmland is relatively unimproved) is assumed to be fixed in quantity (i.e., price inelastic). There are no precise empirical data on the price elasticity of supply of farmland in Poland. However, the price of urban land, which can be easily sold to foreigners, has greatly appreciated in real terms since the fall of communism. A study by Lucka-Matysik (1999) shows that real estate prices in Krakow, a major city in southern Poland that attracts substantial foreign investment, rose tremendously in real (dollar) terms between 199a and 1998. During that period the average price of a building-plot in the prime area of the city rose more than five times (from $14.15 to $72.99 per square meter). In the least attractive part of Krakow, plot prices more than doubled over the same period.

Since there is no reason to believe that the supply of land in Poland is price-elastic, an increase in demand (resulting from foreigners rushing to buy cheap Polish land) should lead to a large increase in the equilibrium price. Actually, the greater the foreign interest in acquiring inexpensive Polish farmland, the greater is the price appreciation. This implies a relatively quick adjustment process. So, if farmland in Poland is indeed an attractive acquisition target, then it will take much less than 15 or 20 years for the price of this asset to appreciate to an average EU level once foreign participation in the market is allowed.

Demand for Farmland

The fundamental question is whether or not the relatively low price of farmland in Poland is a result of market imperfections or other factors. In other words, is farmland in Poland really that cheap?

In competitive markets, asset prices depend on the value of discounted future cash flows--that is, on the net present value criterion. This is also true of farmland. For instance, Roche and McQuinn (2001) show that the price of farmland in Ireland varied significantly over the years 1911-96. Like financial assets, land could be a subject of speculation leading to a major boom-and-bust cycle. Thus, if Polish soil generates huge cash flows and if the current market price of farmland fails to fully reflect the net present value of future cash flows, then arbitrage activity should set in and the demand for land should increase. A rise in demand, in turn, should cause the price to go up. But Poles have shown a lack of interest in purchasing farmland.

In 1992, the Polish government put up 2,30,000 hectares of state-owned farmland for sale, but the state managed to sell only 14,000 hectares and to lease an additional 75,000 hectares (Rowinski 1994). Overall, in the period 1990-97, the share of land in individual use increased only slightly: from 77 percent to 82 percent. Over the same time, private ownership of land increased from 4 percent to 100 percent in Albania, and from 5 percent to 95 percent in Latvia (Lerman 2001). Not surprisingly, Lindemans and Swinnen (1997: 273) observed that "compared with other CEECs, the privatization of agricultural assets in Poland has lagged behind." The authors attribute this development to low profitability of agricultural production, scarce credit, and a mismatch of regional demand and supply. The last factor is a result of the fact that most of the state-owned land is located in the North and West of the country, territories that before World War II belonged to Germany, while family farms predominate in the rest of Poland.

Unlike other former Soviet-bloc countries, Poland retained private ownership of land. Consequently, there should be no shortage of people used to buying farmland and developing it. The lack of interest in buying land most likely reflects a low level of profitability related to investing in this asset.

Productivity of Polish Farmland

The rate of return on farmland is, among other things, a function of its productivity. In Poland, the productivity of land is poor. First, natural conditions are not better than those prevailing in most of Europe. Poland enjoys neither soil of superior fertility nor a better climate than that found in most regions of both Eastern and Western Europe (1). Among the CEECs, Poland is the northernmost, with the least sunshine and the coolest average temperatures. Thus, in terms of climate and fertility, Poland has no advantage in relation to EU countries.

It is evident from Table 2 that average crop yields in Poland are much lower than those for the EU, except for primary oilcrops, and much lower than those for neighboring Germany (for all products). Besides, crop yields in Poland are similar to average yields in other CEECs (except for primary oilcrops and potatoes) in spite of the greater than the region's average use of machinery and fertilizers (see Table 3). It is also worth noting that during the...