Agricultural soft budget constraint

What is it about?

Previous research provides evidence of capital market imperfections in Central and Eastern European (CEE) countries during transition and after accession to the European Union (EU). Some papers have described analyses that tested the hypothesis of the persistence of soft budget constraints (SBCs) in transition economies. However, SBCs may also persist once countries have shifted to market economies, leading to the postponement of restructuring.SBCs may be more important in the agricultural sector, since the government support that farms receive is generally much greater than is the case with firms in the manufacturing sector. This paper describes an investigation of the presence of SBCs and credit market imperfections in Estonian, Hungarian and Slovenian farms. Our comparative analysis includes three countries with different historical-institutional legacies and different farm structures: small-scale farms in Slovenia, and a bimodal structure with small-scale and large-scale farms in Estonia and Hungary.

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Photo by Talchiv Anatol on Unsplash

Photo by Talchiv Anatol on Unsplash

Why is it important?

We find evidence of strong SBCs in Estonian farms and weak SBCs in Hungarian and Slovenian farms during the period following the EU accession period, the financial crisis and the most recent CAP reforms. The reasons why differences across countries exist can be explained by the historical-institutional legacies of income redistribution in agriculture towards large farms in Estonia, the trade-off between emerging small-scale family and large-scale farms in Hungary, and the existence of small-scale family farms in Slovenia that lack the organisational structure and institutional framework for more efficiently integrating into food supply chains, but for whom investment to a greater extent relies on private family resources in underdeveloped capital markets for agriculture.

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