The role of subsidies in Hungarian agriculture

Kovács, Gábor

Keywords: agricultural policy goals, support, competitiveness, profitability, security of revenues

Agricultural and rural development subsidies are very significant in numerous countries of the world. In Hungary, subsidies paid to this sector amounted to nearly 44% of the gross added value produced by this sector in 2008. This support is financed by the consumers and the other sectors as some sort of n indirect tax (mainly on Community level). It is therefore useful to regularly assess whether the distortions caused by agricultural subsidies (e.g. continued production in non-competitive plants, undesirable changes to the production structure) are sufficiently justified due to economical or other benefits, and whether there are more efficient ways of achieving the same goals.
On the average for the period of the last five years, subsidies in Hungary reached 153% of the profit before tax of farms. In other words: only 65% of subsidies became part of profits. The rest was used to fund costs in excess of the value of production. Similarly to other countries, some of which have a more advanced agriculture, farms in the aggregate would suffer serious losses in the absence of subsidies – although 37% would be profitable without them. The study points out that the high level of subsidization in agriculture gives rise to concern primarily because – apart from causing market distortion effects as mentioned earlier – total dependency on subsidies (i.e. decisions made at ‘higher places’ in agricultural policy) can cause producers to fight for retaining and increasing subsidies rather than strive for a better situation through adaptation to changes in the market and improving their competitiveness.
It was found that in the period following Hungary’s accession to the EU, subsidies contributed significantly to attaining agricultural policy goals with respect to growth, competitiveness and efficiency in Hungarian agriculture. From 2004 to 2008, gross production value per hectare grew by 13% at constant prices, while net added value grew by 17%. Net added value per unit of asset value increased by 8%. Work productivity increased by as much as 16%. Another achievement is that in the plants which make up two thirds of economic potential, survival or development appears to be clearly guaranteed. We cannot call it a smashing success, however; partly because the revenue of farms fluctuate too much and partly because – although se progress has been made – we are still lagging far behind the Western European competitors in terms of economical indexes (what is more, behind Eastern European ones as well in some respects).

Full article