Transition Issues in the CIS and Eastern Europe

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A related lesson from Eastern Europe and the former Soviet Union is that patience must be exercised with the process of transformation. In the case of Ukraine, Peter Sabluk has commented that 'new forms of managerial arrangements in which share ownership is allied to self-governing mechanisms for the control of activity, and in which group initiative is rewarded according to results, were only slowly emerging'.208 Similarly, 'Hungary, the veteran of privatization in Eastern Europe, managed during 1991 to transfer only 10% of all fixed assets [to private ownership], and is planning to privatize an additional 80% only over a 5-year period. Even that, however, is a short time span compared with the generation which Professor Lugachov estimated as being the period needed for the gradual cultivation of a spirit of entrepreneurship'.209 In Russia:

Reform is mainly proceeding through the reorganization of existing collective and State farms, in response to government decrees, directives, the setting of targets and of timetables for action, and a slowly emerging body of law. Nearly half have been reorganized into sub-cooperatives, collections of private farms, or closed joint stock associations. However, most of the units continue to rely on the old

206. Reprinted from Agricultural Economics, 13(1), K. Brooks and Z. Lerman, 'Restructuring of traditional farms and new land relations in Russia', p. 23, Copyright (1995), with permission from Elsevier.

207. Z. Lerman, K. Brooks and C. Csaki, 'Restructuring of traditional farms and new land relations in Ukraine', Agricultural Economics, 13(1), October 1995, p. 37.

208. Reprinted from Agricultural Economics, 12(3), G. H. Peters, Agricultural economics: an educational and research agenda for nations in transition', p. 199, Copyright (1995), with permission from Elsevier.

209. Reprinted from Agricultural Economics, 12(3), G. H. Peters, Agricultural economics: an educational and research agenda for nations in transition', p. 205 (citing M. I. Lugachov), Copyright (1995), with permission from Elsevier.

kolkhoz or sovkhoz [collective farms or State farms] structure for the purchase of inputs and sales of output owing to the absence of organized markets. As yet there are few signs of improvement in land use practices.210

I. Lukinov of Ukraine has stressed that 'creation of more efficient economic structures is far from being a matter of passing a limited number of legal acts which do no more than remove the old system. It is a longer evolutionary process of forming new proprietorships, new institutions, new external trade relationships and a great deal of development from below'.211

The experience of Kazakhstan illustrates well the difficulties which can arise in the early years of a de-collectivization process, before adequate substitutes are found for the multiplicity of services that were offered to their members by collective farms:

Land reform has been the most [rapidly implemented] of Kazakhstan's economic reform packages. . .. instead of the 2500 State and collective farms in existence in 1991, at present there are more than 62000 individual farming units, 8754 production cooperatives, 1169 business partnerships, 578 joint stock companies, and only 89 State enterprises.. . . The share of nonstate enterprises is 93.9 percent of all agricultural lands, 94.9 percent of arable land, and 91 percent of livestock and poultry. . . .

The positive changes in Kazakhstan's land allocation to individual farmers fail to reveal the huge losses and crises that resulted. ... In reality, the reforms turned many efficiently functioning large public farming enterprises into numerous small farms, most of which are not viable because they lack machinery and working capital and cannot adapt to market conditions. As a result, the owners of property and land shares again joined together and established production cooperatives on the basis of joint ownership. Further, social tensions in rural areas have dramatically increased because the social protection afforded by the previous system has weakened.

The areas under agricultural crops are decreasing. Crops covered only 21.8 million hectares in 1998, compared with 35.2 million hectares in 1990.212

Replacing a collective farm system entails much more than reassigning land rights. It requires developing a new agricultural extension system, new marketing channels, new modalities of input purchase, new sources of working capital, and new forms of social services in rural areas.

Lerman has documented a significant difference between the countries of Eastern and Central Europe (ECE) and the CIS in transforming the economic structures of co-operative production units:

. .. the new market sounding names [joint-stock societies, limited liability partnerships, etc.] more often than not hide an internal structure which is basically unchanged since the Soviet times. Survey data for the CIS (Russia, Ukraine, Moldova) reveal persistence of traditional management and organization features:

210. Reprinted from Agricultural Economics, 12(3), G. H. Peters, 'Agricultural economics: an educational and research agenda for nations in transition', p. 196 (citing C. Csaki and S. Johnson), Copyright (1995), with permission from Elsevier.

211. Reprinted from Agricultural Economics, 12(3), G. H. Peters, Agricultural economics: an educational and research agenda for nations in transition', p. 201, Copyright (1995), with permission from Elsevier.

212. Reprinted from Food Policy, 25(6), A. Baydildina, A. Akshinbay, M. Bayetova, L. Mkrytichyan, A. Haliepesova and D. Ataev, 'Agricultural policy reforms and food security in Kazakhstan and Turkmenistan', pp. 734 and 738, Copyright (2000), with permission from Elsevier. However, much land cropped in the Soviet Union was unsuitable for agriculture and should have been left as pasture. The reduction of cropped areas is not always bad.

the restructured farms retain a strong central management apparatus, and the functional subdivisions have only token autonomy beyond general production planning. Specifically, finances and labor relations are handled by the central management, and not by the functional units. The majority of member-workers in large-scale farms in CIS report that nothing has really changed in their farm enterprise as a result of restructuring. Even farms restructured as part of international donor projects in CIS often strikingly resemble their collective predecessors. Interesting changes of farm organization are observed in Moldova and Azerbaijan, where many large farms are breaking up into independent multi-family units that occupy an intermediate position between individual farms and former collectives.

In ECE, there appears to be a more significant departure from the old collective-management pattern. Although no comprehensive data are available, case studies suggest that in Hungary, the Czech Republic, and Lithuania many of the large farms have transformed into market-driven corporations. In Romania, at least some of the large farms are new associations or cooperatives created voluntarily by individual landowners after the completion of land privatization. The large corporate or cooperative farms in ECE are now often forced to operate under hard budget constraints, with a real threat of bankruptcy proceedings in case of default. In CIS, neither budget constraints nor bankruptcy laws are enforced.213

Education and dissemination of information can speed up this process of development. In Russia, survey results indicated that information has been a major bottleneck to farm restructuring, and that the desire to restructure by the membership is not enough.214 As in most areas of agricultural development, the factor of human capital is the most important one, and developing managerial capabilities and other skills appropriate for a market economy takes time.

Land tenure regimes are still in flux throughout Eastern Europe and the former Soviet Union, with significant differences between those two sub-regions. In most countries of the region, land markets are still very limited in their scope. The degree of change in land tenure regimes in the region, and the obstacles to further change, have been summarized very well by Renee Giovarelli and David Bledsoe. They highlight issues that are relevant to other regions of the world as well:

In the Western CIS countries, except Moldova, much of the agricultural land has been privatized under a 'land share' system, in which a large majority of private owners (former members of the state and collective farm system) still hold their rights in common, with some form of right to partition land in kind (as yet unexercised). In those countries, the right to a land share has little value because there is little chance to exercise meaningful control over that land share. [This experience illustrates the point made above about the need to make the shareholdings saleable in the privatized or restructured cooperatives.]

In the Transcaucasus, land was distributed and farms restructured at the same time. Private farmers have title to their land. Balkan privatization is advanced. ... In the EU accession countries, the privatization issues are related to the restitution process primarily [which has] slowed down the privatization process.

During the privatization process, some countries have been slow to privatize state land, and instead lease out that land. ... An ongoing concern with leasing of state-owned land is that it is often leased at very low rent levels, thus undercutting the development of private market rents. . ..

Lack of farm reorganization is an impediment to market development in the four

Western CIS countries [Belarus, Russia, Ukraine, Moldova] and many of the EU accession countries that restituted agricultural land to its former owners. .. . Providing a legal and policy framework in which individual farmers can adjust farm size to respond to market signals is crucial. The policy and legal framework should not only allow, but also encourage farm reorganization into units of whatever size is chosen by farmers. .. .

Purchase and sale transactions will not occur in the Western CIS countries unless legislation clearly allows such transactions, permission of local bureaucrats is not needed, and procedures for notarization and registration are simple and affordable. .. . Land-based lending will not occur until there is an active agricultural land market and for Russia, Ukraine, and Belarus major changes in legislation and political will would have to occur first In fact, mortgage lending to any great extent will not occur until: (1) an active land market exists and agricultural land has market value; and (2) foreclosure procedures are reasonably quick and effective. .. .

The Western CIS countries have seriously under-functioning registration systems.. . .215

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