While the sources of growth during the second decade in CEE are evolving, albeit still strong, even more fundamental changes are happening further east in the CIS nations. In fact, when assessing the strength of the effects on the agricultural sector over the entire time since the beginning of transition, some of the most fundamental changes have taken place in the second half of the 1990s and since 2000. Two new sources of change are, first, new and fundamental changes in land and farm reform policies following the disappointments of the earlier attempts to reform land policies, and, second, fundamental improvements in the terms of trade for several countries following the Russian financial crisis in 1998 that have greatly benefited the farming sector.
First, the disappointing results of the land shares policy caused several CIS governments to change land reform strategies, and move from the system of paper shares to one based on allocation rights on a plot-specific basis. The first to change were the poorest countries with the most labour-intensive agricultural systems.1 In 1996, both Azerbaijan and Kyrgyz Republic began to replace ill-defined paper shares with the distribution of land in kind to rural households. A much more complete individualization of agriculture followed rapidly. In Azerbaijan, for example, individual land use increased from 14 per cent in 1996 to 93 per cent in 2000.
In the second decade this trend of land policy shift continued by spreading to other countries and taking deeper root. In 1998, a change in government in Moldova led to a similar change in land reform and farm policy.2 Land was distributed in physical plots to individuals who had previously owned shares. This induced a large exit of individuals from corporate farms. By 2000 households were using almost 60 per cent of the land and more than 90 per cent of the livestock, producing 73 per cent of total output. In 1999, the Ukrainian government made a radical change in land policy by replacing the land shares by actual landownership titles and gave them to rural households. These policy implementation shifts made it easier for households to start their own farms. The new measures also increased the pressure on managers of corporate farms to manage their farm efficiently. In Kazakhstan important land policy changes also took place, albeit of a somewhat different nature. In 1998, a drought caused widespread crop failure. Many producers defaulted on their loans. Given the softness of the budget constraints that still dominated the relationship between farms and government, the drought-induced crisis nearly bankrupted the entire government. As a result, the government was forced to introduce for the first time bankruptcy proceedings. The impact of the new hard line was immediate and multi-dimensioned. In the most fertile parts of the northern region, large trading and processing companies purchased whole sets of bankrupt state and collective farms and established huge vertically integrated grain- and oilseed-growing companies. Many of the new farms owned hundreds of thousands of hectares of land. In other parts of the country the bankruptcy of farms reinforced the growth of individual farms. Whereas individual farming was once difficult and rare, after 2000 individual farms were producing more than 75 per cent of nation's total farm output. In 2003, a new land code replaced long-term leases with actual ownership titles.
Second, during the second decade shocks external to agriculture began to have major impacts—often positive ones—on the sector in many CIS countries. In the aftermath of the Asian financial crisis in 1997, a financial crisis in Russia in 1998 caused a large devaluation of the Russian currency. The same effect occurred, although to a somewhat lesser extent, to countries close to Russia, such as Ukraine, Belarus, and Kazakhstan. Around the same time, world oil and gas prices started rising.
These shifts in prices and currency values, as it turns out, had profound impacts on the agricultural economies even though the incidence of the shifts in resource prices had little to do with food. There were both direct and indirect impacts. The direct impact was a strong improvement in the competitive position of these countries' agri-food sector vis-à-vis the international market. Relative prices increased significantly. With higher prices there was suddenly a greater incentive to invest in the sector and seek out more effective ways to organize production. The most significant, positive indirect effect was that it improved the attractiveness of the food industry in these countries for capital investments. For the first time in years, there was interest by outside investors (both from outside the country and from other sectors inside the country) to bring injections of capital into the food economy. Furthermore, for those countries exporting oil or gas (for example, Russia, Kazakhstan, and Azerbaijan) the increase in oil and gas prices had a significant effect on government revenue and profits in other sectors of the economy. These in turn enhanced the availability of domestic capital in these countries.
In combination, these two factors—the rise of profitability of agriculture and the increased availability of capital—resulted in the inflow of considerable investments in the agri-food industry. Some of the new investments came via a system of vertical integration. Vertically integrated farms had access to inputs for their farms. Other investments were directly into the processing sector which made output markets more accessible. Both of these effects were the strongest in countries like Russia and Kazakhstan where the agri-food sector benefited both from improved competitiveness with the 1998 devaluation and from the effects induced by increased oil and gas prices.
Hence, although in the second decade we see the emergence of new sources of growth, the nature of the economic forces is actually similar to those that were underlying the changes to other regions (for example, East Asia and CEE) during the first decade. As the analysis in this book would predict, the combination of improved terms of trade and reform-induced property rights has led to significant growth in the farming sectors. For example, over the period 1999-2002, average growth of agricultural GDP was around 5 per cent in Kyrgyz Republic and Ukraine. Growth rose to around 9 per cent in Azerbaijan and Kazakhstan. Statistical sources report that agricultural growth exceeded 10 per cent in Russia and Tajikistan. In addition, some of the worst of the poverty in rural areas has begun to be mitigated in several of the CIS countries. For example, rural poverty declined strongly in Azerbaijan, Moldova, Russia, and Kazakhstan after 1999 (Macours and Swinnen 2005).
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