Hard budget constraints and farm restructuring

One key policy variable in the farm restructuring process which has had an important impact on the change in management, and consequently efficiency, was the introduction of hard budget constraints. This, more than the size of the farms, distinguishes recovery and efficiency growth from continued decline (see Chapters 4 and 5). In this, transition nations of East Asia and CEE are more similar and differ from policies in Russia, Ukraine, and Kazakhstan.

In China and Vietnam, the move to household farming via the HRS reforms de facto meant the introduction of hard budget constraints. After reform, farm households were on their own to earn profits and the state was not involved directly in the process of farming after decollectivization. In other countries where workers started household farms, for example in Albania, Romania, and the Transcaucasian nations, the same happened.

Central European governments imposed hard budget constraints early on in the transition. The removal of budget support in many of these nations forced important changes in farm management. For example, in Central Europe the reforms basically gave control and income rights to the managers regardless of the exact organizational form of the farm. Moreover, many of the new farming enterprises no longer guaranteed employment to their shareholders. Farm managers also faced the threat of bankruptcy proceedings if they failed to pay back their loan in timely manner.

Unsurprisingly, when implemented faithfully in Central Europe, the imposition of hard budget constraints radically changed the organizational behaviour of farm enterprises. Many of the larger farms turned into market-driven corporations (Lerman, Csaki, and Feder 2004). Others began to make managerial decisions centred on improving the efficiency of the farms. The most pervasive effect was that corporate farms substantially reduced their labour use by laying off workers (Swinnen, Dries, and Macours 2005).

In contrast, leaders imposed far softer budget limitations on farms in Russia and several other CIS countries and as a result the restructuring of large farms was far less profound. For example, Csaki et al. (2002) argue that even after more than ten years of reform large farm decision making in Russia still has important features similar to those of the pre-reform collective farm structures. Farm leaders during the first ten years of transition were still committed to providing all members with jobs, regardless of cost-efficiency considerations. Farms were also obliged by tradition and sometimes by government pressure to maintain the social infrastructure of the village. In many cases, because of these other obligations, farms put little emphasis on profits. The continuation of many of these anachronistic practices is linked to the failure to eliminate soft budget constraints since managers could overspend and still get reimbursed, wages were paid regardless of farm profits, and banks continued to tolerate the non-payment of farm loans. Similarly, in some countries, such as Kazakhstan,

[i]nitial attempts at reform, which saw the state and collective farms converted first into collective farm entities and subsequently into producer cooperatives, involved little real change in patterns of ownership management and control [because] up to 1998 the former state and collective farms were never subjected to a hard budget constraint.. .. [Wjithout the sanction of the threat of bankruptcy there was little incentive for farm managers either to reduce their indebtedness or to reform their internal governance.15 (Gray 2000: 1)

While it appears clear that the soft budget policy of a nation was linked to its progress in farm restructuring, this is clearly a proximate cause. Perhaps the more interesting political economy question is the one that seeks to get at the fundamental determinants: why is that countries such as Russia, Ukraine, and Kazakhstan were much slower in introducing hard budget constraints in farms than those in Central Europe? This question is of particular importance since it raises the issue of how and why certain governments could proceed (and others could not) with efficiency-enhancing policies despite obvious negative welfare effects for a significant part of the population, at least during a transition phase.

While difficult to measure, one factor many believe played an important role in determining the speed and extent of reform is the political and social consensus of a nation about its willingness to move toward a market economy. For a variety of political, geographical, and cultural factors, the consensus was much stronger in Central Europe and the Baltic countries. Simply put, after decades of Soviet domination these countries were strongly motivated to move towards 'the West'. In contrast, the absence of such a strong push made radical changes less compelling for Russia and many other CIS countries.

Second, wealth, in a number of forms, matters. The introduction of hard budget constraints, as seen, inevitably had negative consequences for a number of individuals, in particular those that got laid off. Besides losing their current income, loss of a job often meant the loss of the benefits associated with employment at the work unit. Therefore, to the extent that a nation could meet the needs of the laid-off worker, the magnitude of the loss could have been great or small. Two factors could greatly minimize the impact of a lay-off: fairly high prospects of finding a new job; and a nationwide social security system that would be able to make unemployment or welfare payments and take care of health and other basic needs. In short, since access to social security, publicly provided insurance, and welfare systems is highly correlated with either relatively high growth or high wealth, the wealthier countries in Central Europe were the ones that moved most aggressively in hardening budget constraints and allowing lay-offs. They also were the nations in which farm restructuring proceeded the furthest during the first ten years of reform.

Interestingly, in the poorest countries, access to land for households also means that households could use land as a substitute for social insurance and income. In these countries, agriculture plays a 'buffer role' during transition, not only absorbing excess farm employment, but also employing additional workers when they return to rural areas after being laid off from their industrial jobs. In those countries pre-reform services were often limited and the growth of individual farming, with hard budget constraints, allowed households to cope with the situation.

In contrast, during the first ten years of reform the implementation of hard budget reforms was slower and less comprehensive in countries with relatively capital-intensive production systems but with social services linked to the farms and limited budgets for pensions and unemployment benefits. This was the case in countries such as Russia and Ukraine. The imposition of hard budget constraints was strongly opposed by local leaders and rural households because alternative income sources were limited and households were heavily dependent on farms not only for their current cash incomes, but also for a large set of social services. Rural households faced problems accessing basic social services if they became disconnected from the (reorganized) collective farms (Dudwick et al. 2003; O'Brien and Wegren 2002).

Some of the most important constraints on restructuring and labour adjustments in Russia and Ukraine took the form of the state's role in providing housing, education, and health care (Brooks et al. 1996). Mobility costs for workers were also high due to poorly developed housing markets. Access to health services outside the collective also affected the ability of individuals to shift their jobs. In part because of this system, at the end of the 1990s, in Russia most companies were paying at least part of their wage bill in kind and through fringe benefits rather than cash. Because most of the goods and services provided could not be converted into cash, this compounded the difficulty of workers being able to move to other jobs or regions (Friebel and Guriev 1999).

However, it should be acknowledged that the impact of this factor was mitigated by strongly reduced funding of rural services. Access to many of the social services formerly provided by the state and collective farms were already strongly reduced with dramatic cuts in budget allocations and subsidies in the early 1990s, independent of the farm restructuring process.

Was this article helpful?

0 0

Post a comment