Agricultural reform in Ukraine since 1991 has had three main components. The first two, which largely grow out of Soviet-era reforms, are restructuring of the large farms and land reform.
The third, stemming from economy-wide privatisation efforts and international investors’ interests, is the development of private-sector businesses in agricultural supply and farm services (up-stream agriculture) as well as in processing and sale of farm products (down-stream agriculture). Despite the best efforts of all concerned, these three major types of activity have not been well integrated.
Nor have they been particularly successful.
3.1 Restructuring farms and land reform
During the late 1980s, it was argued that if farm workers had to pay for their own inputs, equipment, and land they would be spurred to increase production.24 Experiments seemed to result in
21 Copy of program in author’s possession.
22 The most comprehensive study is WORLD BANK (1992).
23 Western critiques of agricultural reform in the Russian Federation, and, by extension, Ukraine as well, generally focus on their social effects, which have, indeed, been extremely severe.
24 This was the original justification for the creation of sharecropping teams within large farms beginning in 1987, and the establishment of independent, often family-run, farms starting about two years later. These new farms, mis-called
‘peasant farms’ at CPSU ideologists’ insistence, were intended to be organised and to operate like family-owned farms in the United States or Western Europe. In Ukraine, these farms are 'private' in the sense that they are not 'pub-lic' like collective or state farms. However, most of them own only a small part of their land, and even that is subject to severe land-use restrictions. So these individual farms are not private in the sense of private ownership. These indi-vidual farms should not be confused with farm workers’ household plots, gardens of up to one hectare in size given to all workers on the state and collective farms but which are always worked in addition to employment on the big farms.
increased output, so it was asserted that their general introduction would lead to a rapid and cheap increase in agricultural output.25 Although some advocates of the new organisational structures saw them as eventually supplanting the large collective farms, most of the advocates of reform assumed that the large collective and state farms and the new individual farms would co-exist.26 This competi-tion of forms of farm organisacompeti-tion and management was expected to stimulate fuller use of existing resources and a rapid increase in total production. Ukraine therefore adopted a Law on Peasant Farms in 1991.27 But the creation of individual farms has not been a particularly important part of agrarian reform in Ukraine since 1991 for at least three reasons: 1) individual farms, like large farms, depended on state support, and so their creation stalled as that support dried up; 2) the farm-ers themselves have, like other reformfarm-ers, been unable to build sufficient political support to expand their movement; and 3) the economic and political conditions which have worked against all farms have particularly hit the individual farmers’ new and unpopular (with the government and many neighbours) businesses.
The restructuring of the large farms was a logical outgrowth of late-Soviet-era reform efforts.
The general method seems to have been first described in detail in a Russian Federation Law in late 1989. It was adapted to Ukraine in the ‘Law on Collective Agricultural Enterprises’ adopted in 1992. In general, it provided that agricultural land should be denationalised, land holdings of large farms should be equalised within rural districts (with any surplus given to the district for distribution to individual farmers), then divided into equal shares – corrected for land quality – and distributed to all eligible members of the farms. Non-land productive assets of the farm were also to be divided, but in shares weighted according to farm members' contributions to producing those assets (usually measured as total earnings over a period of years). However, physical plots of land and physical assets were to be given only to people leaving the farm in order to set up their own independent farms. Those who remained in the group farm could choose to recommit their shares to a new corpo-rate entity. Thus most people received 'conditional shares', or 'entitlements', not physical land plots or actual assets.
This method of reform allowed free choice about use of assets by permitting those who wished to leave the large farms to strike out on their own. As they received their own property, it became more possible for individuals to oppose local autocrats. Creating new large farm enterprises allowed the state, in principle, to reduce or end subsidies to the farms, although Ukraine in fact con-tinued to subsidise the successor farming entities. Equity, i.e. providing everyone with an equal share of the limited resource of land but a graduated share of non-land assets based on property, was also observed. These were all values prized by the initial Russian and Ukrainian designers of the reforms.28 By changing the legal form of ownership, farm restructuring also fit with a curious legalist bias inherited from Soviet times. If socialism equalled nationalisation and state ownership, as Stalin had decreed, the end of socialism could equally be defined as the return of formal private ownership.
This 'share system' of farm reorganisation was soon taken up by Western aid donors, particu-larly the International Finance Corporation – with substantial financial support from USAID and later the British Know-how Fund – and developed into the 'Nizhnii Novgorod method'. Early
Individual farmers rarely wish, and until 2000 were not permitted, to continue working on a large farm after they es-tablish their own farm business.
25 The best-known assertion of the individual farm’s superiority was Russian Prime Minister Ivan Silaev’s claim, while introducing legislation to allow the creation of individual farms at the II RSFSR Congress of People’s Deputies in 1989, that the creation of a mill. individual farms would ensure that all Russia’s needs for food would be met.
26 VAN ATTA (1990).
27The Law was extensively revised in 1993. “Law of Ukraine ‘On the peasant (farmer-type) farm,’” Zemel’ni vidno-syny v Ukraini, p. 144-154.
28 Author’s interviews with Vladimir Fedorovich Bashmachnikov, El’mira Nikolaevna Krylatykh, Aleksandr Aleksan-drovich Nikonov, Evgeniia Viktorovna Serova, Vasilii Iakimovich Uzun, Petr Trofimovich Sabluk, and others, 1988-2000.
sions of the IFC manual on farm restructuring set as a goal that farms should be entirely broken up.
However, that stipulation disappeared from subsequent editions of this handbook, as experience in Nizhnii Novgorod oblast and elsewhere showed that most farms reorganised into no more than half-a-dozen large units, often following village community lines, with a few outlying individual farms.
This farm restructuring system was adapted to Ukraine by IFC. Although both were constrained by the legal framework, the USAID-sponsored agricultural land-share project placed more formal em-phasis on full demarcation of land parcels, while the British Know-how Fund/Cargill Technical Ser-vices large farm restructuring project concentrated on assembling large tracts of land that could be leased out.29
The various adaptations of the share system of farm restructuring fit well with Westerners’
assumptions that fixing definite rights to determined pieces of property, providing the opportunity to reduce the scale of production somewhat, and helping to assure equitable distribution were keys to a workable land reform that would make productive resources more mobile. Although fully restructur-ing a farm was a lengthy and expensive process, the results were easy to see, appeared to represent real change, and meant that foreign donors could say they had done something substantial about reform in agriculture within the limited time horizon of their projects.
However, in Ukraine agricultural land shares have not proven to be as transferable as initial advocates of the system had hoped. Although the constitution allows for private property in land, the country’s present land code does not allow for purchase and sale of agricultural land.30 In the ab-sence of firm legal guidelines, many local and national authorities with some jurisdiction over land sales often refuse to allow land transactions. When they do approve transactions, these are always tainted by the possibility that they may later be overturned by higher-level legislation.31 Moreover, farm land shares remain constrained by a web of regulations requiring that the land be used for agri-culture and produce average crops. If the land is not used and does not produce, it may be seized from the owner in an administrative procedure.
Inflation, the reduction of agricultural subsidies, changes in the terms of trade with industry as a result of price liberalisation, and general economic uncertainty have made the perceived risks of farming in Ukraine much greater since 1991. Given these unfavourable circumstances, it is no sur-prise that all surveys as well as case studies of individual farms show relatively little interest among farm employees and workers in becoming independent farmers. In the absence of economic stimuli to encourage farmers to take their land and asset shares and exit the farms to set up on their own, and given circumstances which make the viability even of larger daughter enterprises doubtful, the process of farm reorganisation becomes essentially an administrative exercise. The exercise may be very valuable in implementing procedures which will allow people to safeguard their property rights, but in the absence of a real possibility to use that property, the property rights are unlikely to be taken seriously by the recipients. In fact, despite the best efforts by those involved to ensure that everyone involved understands their right and opportunities, all the donor-supported farm restructur-ing systems have in fact been implemented like previous ‘reforms’ in collectivised agriculture, by carrying out generally-applicable administrative commands from the centre.
3.2 Development of private sector up- and downstream agriculture
When the current wave of agricultural reform began in the late 1980s, most attention was concentrated on land reform. Government aid agencies and international financial institutions gener-ally followed that priority. However, it soon became clear that new forms of land tenure, whether
29 For detailed description of the various donor-developed farm restructuring methods, see LERMAN & CSAKI (2000).
30 See chapter 14 on A Market for Agricultural Land in Ukraine.
31 There is a close parallel here to the pre-Revolutionary Stolypin agrarian reforms. Land sales were allowed under a 1906 governmental decree, but until the decree was finally enacted into law by the State Duma in 1912, local authori-ties often refused to carry out land transactions for fear they would later be overturned.
individual farms or restructured large ones, would make little difference in the lives of their owners and workers and have little economic effect until and unless the institutions of state planning which controlled their activities, and the supply, service, processing and marketing agencies with which they dealt, were also transformed. Most of those organisations had a single or very few agencies in each rural district responsible for dealing with assigned nearby large farms. The resulting monopo-lies, created by the pattern of location of enterprises and transportation in the countryside, were rein-forced by state-set pan-territorial pricing regardless of enterprise efficiency or prime costs. The up-stream and downup-stream enterprises were initially treated as part of the general process of industrial privatisation. However, the Verkhovna Rada insisted that primary agricultural producers had special interests in their suppliers and those to whom their products were delivered, and so enacted special legislation to govern the process of upstream and downstream agricultural privatisation. Under these 'peculiarities' laws, the various monopolies were generally transformed into regional associations part-owned by the farms they served or from which they purchased output, and part-owned by local and national governments.
Most privatised up- and down-stream enterprises have become part of regional or national associations. While nominally private, these associations continue to act as parastatal agencies, and are often given instructions in government resolutions. These 'private' agencies tend to be headed by former officials who may or may not be on good terms with serving government officials.
In some cases, such as the former Main Administration of Input Supplies of the Ministry of Agriculture which became the Ukragroprombirzha corporation, or the Main Administrations of Grain Processing and Grain Storage which became the Khlib Ukrainy (Bread of Ukraine) Corpora-tion, units of the Ministry of Agriculture became 'private' corporations – often with a substantial share of government ownership. In other cases, it appears that officials managed to convert their positions into ownership of private enterprises, in the process acquiring substantial amounts of wealth. In any event, records are often not made public and the precise ownership and degree of in-dependence from state control of many ostensibly private up- and downstream firms in agriculture is the subject of much speculation and rumour. Clearly, this is hardly the sort of level and transparent playing field needed to encourage desperately needed foreign direct investment in Ukrainian agricul-ture.
The little foreign investment that has taken place has been a second source of reform in up- and down-stream agriculture in Ukraine. Most major international agrobusiness companies have made at least defensive entries into Ukraine in order to position themselves in an important produc-ing country, in case the market opens up. Substantial business has been done in supplyproduc-ing agricul-tural chemicals and farm equipment, and substantial amounts of Ukrainian agriculagricul-tural commodities received in payment for these inputs have been exported by these agrobusiness investors. Indeed, agriculture (specifically the up- and downstream industries) has received more foreign investment than any other sector of the Ukrainian economy – although, given the small total amount of foreign investment in the country (Ukraine has received a total of only 3.7 bUS$ of foreign direct invest-ment since Independence), this is not saying much.
Often with the encouragement of US and other donor government programs, international investors have connected with and supported Ukrainian private up- and down-stream companies. In this way they have helped to create a larger private sector capable of and interested in resisting state encroachments on their business. However, these agrobusinesses, like any other businesses, want stable customers who are capable of paying their debts. Moreover, they have been able to operate only where the political authorities have allowed them to do so. For both these reasons, there ap-pears to be little business between restructured farms and private input suppliers and marketers.
Since it is likely that farms that choose to go through the restructuring process are marginal (why attempt a serious reform unless the situation is desperate?) this lack of co-ordination is understand-able and represents a rational business decision on the part of input suppliers. However, by provid-ing inputs to unreformed large farms, this private sector activity may be prolongprovid-ing the process of
reform, and, if in fact the large farms are unviable and will eventually have to change, then these private-sector efforts have cut against reform. It might not even be too much of an exaggeration to say that, in effect, the international agrobusiness that provided large amounts of inputs to Ukrainian agriculture in the mid-1990s were, in effect, simply taking over the role of the former Soviet state.
The considerable difficulties many of those firms encountered in obtaining timely repayment for the inputs they supplied suggests that most Ukrainian farm managers and agricultural officials believed this to be the case.