New regulations governing land sales in Central and Eastern Europe: Imposing restrictions via particularised institutions Pavel Ciaian Dušan Drabik Jan Falkowski d'Artis Kancs 2017 EUR 28088 EN This publication is a Technical report by the Joint Research Centre (JRC), the European Commission’s science and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication. Contact information Name: d'Artis Kancs Address: Via E. Fermi 2749, I-21027 Ispra (VA), Italy E-mail: d'[email protected] Tel.: +32 229-59203 JRC Science Hub https://ec.europa.eu/jrc JRC102645 EUR 28088 EN PDF ISBN 978-92-79-61640-2 ISSN 1831-9424 doi:10.2788/246007 Luxembourg: Publications Office of the European Union, 2017 © European Union, 2017 Reuse is authorised provided the source is acknowledged. The reuse policy of European Commission documents is regulated by Decision 2011/833/EU (OJ L 330, 14.12.2011, p. 39). For any use or reproduction of photos or other material that is not under the EU copyright, permission must be sought directly from the copyright holders. How to cite this report: Pavel Ciaian, Dušan Drabik, Jan Falkowski and d'Artis Kancs; New regulations governing land sales in Central and Eastern Europe: Imposing restrictions via particularised institutions, EUR 28088 EN, Publications Office of the European Union, Luxembourg, 2017, ISBN 978-92-79-61640-2, doi: 10.2788/246007 JRC102645 All images © European Union 2017 New regulations governing land sales in Central and Eastern Europe: Imposing restrictions via particularized institutions?1 Pavel Ciaian,b Dušan Drabik,c Jan Fałkowskia and d'Artis Kancsb aFaculty of Economic Sciences, University of Warsaw, Poland bDG Joint Research Centre, European Commission, Italy cAgricultural Economics and Rural Policy Group, Wageningen University, The Netherlands Abstract In response to the expiration of the transitory restrictions imposed on agricultural land acquisitions by foreigners, governments in Central and Eastern Europe have introduced new rules governing land sales transactions. Since direct restrictions on foreign investors would now be illegal under the EU treaties, the desire to preserve the status quo has resulted in limited access to land not only for foreigners but also for some groups of domestic investors. In this study, we analyze land market regulations adopted in Latvia, Poland, Romania, and Slovakia. We argue that these new regulations create particularized or non-inclusive institutions. We also argue that the new land market regulations will likely result in reduced competition and thus affect land prices, sale transactions, and access to land. The market impacts are different across the four countries due to the heterogeneity in the newly adopted regulations. Key words: land acquisitions, land regulations, particularized institutions, Central and Eastern Europe JEL classification: Q15, D02 1. Introduction Upon joining the European Union (EU) in 2004 and 2007, New Member States (NMS) from Central and Eastern Europe2 were granted a possibility of introducing transitory restrictions on agricultural land acquisitions by foreigners from EU Member States (European Commission 2014). The transitional measures were adopted to allow land markets to adjust gradually to competitive pressures from the single EU market. These pressures primarily originated from substantial differences in agricultural land prices between NMS and Old 3 Member States (OMS) (e.g., Swinnen et al. 2013). 1 We are grateful for comments from seminar participants at the European Commission. This report is based on Ciaian et al. (2016). The authors are solely responsible for the content of the paper. The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the European Commission. 2 Throughout the text, the term New Member States (NMS) refers to the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia (joined the EU in May 2004), as well as Bulgaria and Romania (joined in January 2007). 3 Old Member States (OMS) include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UK. The transitory measures expired in 2014 (in Poland in 2016). Subsequently, NMS governments introduced new regulations to govern national land markets. The objective of our report is to map these new land market regulations and analyze their potential impacts on farmland markets. In particular, we analyze to what extent these regulations limit access to land resources and create potential barriers constraining the optimal allocation of resources. We analyze land market regulations adopted in Latvia, Poland, Romania, and Slovakia. These four case studies are representative of the whole region as they allow us to capture significant heterogeneities in regional and socio-economic contexts that can be observed across NMS. The countries under study cover various geographical locations and exhibit different levels of the economic development, which implies that they potentially face a different demand for land from foreign and domestic non-agricultural investors. The structures of the agricultural sector and farmers’ lobby also differ in these countries due to a different legacy of the communist era. The analyzed countries also display substantial heterogeneity in terms of the role that land sales and land rental markets play for the local farmers. As a result, the four countries under investigation allow us to identify both similarities and differences in responses of NMS governments to the challenges related to the expiration of transitory measures which regulated their land sales markets after the accession to the EU in 2004/2007. As we show in this report, a common trend among many NMS was to preserve the status quo, that is, to maintain effective restrictions to the land acquisition by foreigners. Given that direct restrictions on foreign investments in the land would now be illegal under the EU treaties, the desire to preserve the status quo has resulted in limited access to land not only for foreign investors but also for some groups of domestic investors. As a consequence, the new regulations resulted in a non-level playing field, where the group of land market participants with easier access to land transactions is favored at the expense of other groups. We, therefore, argue that the new regulations governing land markets in the NMS under study could be viewed as an example of what the institutional economics literature describes as a limited access order (North et al. 2009); non-inclusive institutions (Acemoglu and Robinson 2012), or particularized institutions (Ogilvie and Carus 2014). While each of these concepts has its distinctive features, they all put great emphasis on the fact that institutions can be classified according to their effect on the opportunities that individual agents/different social groups are given to participate in economic activities. There also seems to be a consensus that institutions encouraging economic participation by large proportions of people are more favorable to stimulating economic performance than institutions providing privileges only to a 2 relatively small subset of agents in the economy. The key role of distributional conflicts between different interest groups for the development of institutions and their impact on various socio-economic aspects is another important message emerging from the literature. These claims receive strong support in arguments advanced both in an early institutional economics literature (e.g., Commons 1924) as well as in more recent studies which use an institutional political economy approach (e.g., Obeng-Odoom 2013). In this report, we investigate the impacts which the new land regulations, viewed from that perspective, may bring about. As such, our work relates to the extensive literature studying the importance of land institutions for economic outcomes (e.g., Binswanger et al. 1995; Sokoloff and Engerman 2000; Deininger and Feder 2001; Banerjee and Iyer 2005; Vollrath 2007). These studies provide ample evidence that the way land markets are organized exerts a significant impact not only on the agricultural productivity but also, and more generally, on the economic development. An important channel through which this impact might be transmitted relates to land distribution and land inequality in particular. We try to complement these contributions by analyzing the likely impact of governmental restrictions imposed on land transactions. This issue is important as state interventions in land markets may reduce land inequality (e.g., Piet et al. 2012), suggesting that an additional mechanism transmitting the impact of land institutions on the agricultural performance is needed. In addition, while the existing literature is mostly concerned with the historical analysis, our investigation focuses on institutional changes taking place now. Our work also relates to studies analyzing the functioning of land markets in the EU. On the one hand, we refer to the literature focusing on existing land market regulations (e.g., Ciaian et al. 2010; Latruffe et al. 2013; Swinnen et al. 2014a,b). While these studies