by a lack of political support by local and national authorities, and by unequal tax treatment. As of May 2001, a law that has been submitted to the Verkhovna Rada which at least meets the minimum requirements of regulating CUs activity, has not been adopted. If adopted, this law would regulate the use of the term 'Credit Union' and it would be the normative basis for the functioning of the na-tional CU association etc. CUs and CBs should be given the right to do business with non-members, and they should be subject to general banking supervision.
5.2.3 The development of leasing
Leasing is an efficient means of using long-term assets such as machinery when enterprises lack the liquidity needed to purchase these assets. Hence, leasing could be an attractive instrument for agricultural producers and other enterprises in rural areas. However, the volume of leasing opera-tions in Ukraine lags far behind expectaopera-tions. According to data from the NBU, leasing operaopera-tions amounted to 450 mUAH in 1999, and UKRLEASING – the Ukrainian Leasing Association – esti-mates that the volume of leasing transactions was even smaller in 2000, not exceeding 300 mUAH.
As of today, there are over 50 leasing companies in Ukraine, of which not more than 25 actually operate. About 16 leasing companies, most of which were founded by agricultural machinery pro-ducers or banks, work in the agricultural sector.20
The volume of leasing transactions in the agricultural sector amounts to almost a half of all leasing transactions in Ukraine. This is caused mainly by involvement of the state in this sector.
With the Resolution of the Cabinet of Ministers No. 1031/97, the State Leasing Fund was initiated to provide agricultural enterprises with machinery and equipment produced in Ukraine. However, from the very beginning this Fund was very inefficient. Agricultural enterprises received altogether 8,345 units of equipment worth 391 mUAH from the State Leasing Fund as of March 2, 2001. However, the Fund could collect no more than 20.6% of due payments as of January 2001! This is the main reason why the Fund has also failed to make timely settlements with the producers of agricultural machinery. The company Ukragroleasing became the successor of the State Leasing Fund in July 1999, and is now responsible for managing its funds.
The funds that were channelled via the budget and the Leasing Fund towards agricultural producers have enabled them to purchase some machinery. But as the low payment rates show, the Leasing Fund was unable to assess the creditworthiness of lessees. Hence, the establishment of this organisation did nothing for the sustainable development of a market-based leasing system. Indeed, it is very likely that it was counterproductive, as it blocked private initiatives to develop the leasing market.
Leasing operations in Ukraine are regulated by the 1997 Law on leasing No. 723/97-BP. This law has many disadvantages that are addressed in a new law on leasing that was approved in second reading by Parliament on April 5, 2001. The adoption of this law is a priority.
guarantee funds, intervention price systems, land set-aside payments and so on? Why shouldn’t Ukraine implement such policies as well?
While it is true that these policies are employed in the EU for example, they are very costly and controversial. Most farmers in the EU are not content with these policies. The following argu-ments against agricultural sector banks and/or heavy subsidies should be considered:
1. The effects of most of these policies are quite clear as stressed by observers such as VON P IS-CHKE (1999): „ ... to the best of [my] ... knowledge, government or donor intervention moti-vated by the desire to overcome market failure in a developing or transition economy has never – never – produced a viable credit institution or program“. The reason for this very pessimistic conclusion is clear: State lending institutions must operate in the same environ-ment as private institutions. While state lending institutions may be able to refinance them-selves at lower rates (at the expense of taxpayers), they are nonetheless confronted with the problems of risk and information asymmetry that private lenders also face when dealing with agriculture. Experience in countless projects in countries all over the world have demon-strated conclusively that the state is no better able to identify creditworthy borrowers than private lenders are. Moreover, state lending institutions are often under considerable political pressure to provide loans to loss-making enterprises. This has been amply demonstrated by the experience with state subsidies for farms in Ukraine in past years. These subsidies, which have often taken the form of credits, have helped many CAEs to avoid necessary restructur-ing, they have fostered a highly irresponsible attitude towards debt repayment on the part of many farm managers, and they have fuelled large budget deficits in Ukraine, thus contribut-ing to macroeconomic imbalance and high interest rates. This is why international observers of Ukrainian policy are rather perplexed by the fact that there are so many Ukrainian sup-porters of a policy that has proven to be unsuccessful in almost all countries world-wide.
Don’t the supporters of these ideas believe in international experience? Or is Ukraine so dif-ferent from all other countries of the world?
2. Observers are also puzzled by the fact that there are so many supporters of subsidy programs for Ukrainian agriculture. Massive subsidies in Soviet times (that were twice as high as the subsidies provided in the EU) did not contribute to an increase in the competitiveness of Ukrainian agriculture. And the subsidies of the nineties – the state provision of inputs, the tax breaks and the cancellation of debts – were equally ineffective. Providing subsidies to agri-culture in Ukraine is like doping an untrained athlete. The doping might help for a while (if side-effects are ignored), but it also reduces the incentives to train effectively.
3. The last fact that puzzles international observers is how and where government funds are used in Ukraine. Subsidies are very often channelled to the productive sector (for example, via VAT breaks, the state leasing fund etc.). At the same time, other government tasks which are seen as public goods in Western market economies are neglected totally. Why, for exam-ple, is the educational system in rural areas still so poor? Why do many Ukrainian schools and universities engaged in agricultural sciences lack the funds for international literature, modern curricula etc.? The reason is, of course, the lack of money – scarce money that is be-ing spent on subsidies for agricultural enterprises.
At this important stage of the reform process, Ukraine should use its limited budget funds and managerial capacities to create the conditions for rural finance and for the development of rural areas instead of wasting them on projects that have failed in other countries.
7 References
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CHAMBER OF ACCOUNTING OF UKRAINE (2000): Über den Stand der Rückzahlung von Haushaltsanleihen, erhalten von Unternehmen der Landwirtschaft von 1994 bis 1999.
February 2000, Issue No. 3.
CHAPKO, I. (2000): Financing of Agriculture: Ukraine’s Problems and US Experience. UAPP discussion papers, Number 18. Kyiv.
EUSEBIO, M. & BRYDE, P. (1999): Grain Receipts in Economies in Transition: An Introduction to Financing of Warehouse Receipts. In: OECD Expert Meeting on Agricultural Finance and Credit Infrastructure in Transition Economies. Paris.
FORSTNER, B. (1999): Erfolgskontrolle der einzelbetrieblichen Investitionsförderung in der Landwirtschaft. 40. Jahrestagung der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V., Kiel.
GERMAN ADVISORY GROUP ON ECONOMIC REFORM IN UKRAINE: Various papers.
MINISTRY FOR THE AGROINDUSTRIAL COMPLEX (MINAIC) (annual): Annual Farm Accounting Reports. Kyiv.
NATIONAL BANK OF UKRAINE (2001): Statistical data. www.bank.gov.ua
NEUBERGER, D. (1997): Johann Heinrich von Thünen als Förderer der Finanzintermediation.
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Ukraine: The Financial Sector and the Economy. A Framework for the Next Stages of Reform.
SABLUK, P. (2000): Reforming the Social Sphere in the Countryside, Organisational and Methodological foundations. Sabluk, P. (eds.): Institute of Agrarian Economics, Kyiv.
SECRETARIAT OF THE AGRICULTURAL COMMISSION & GERMAN ADVISORY GROUP ON ECONOMIC
REFORM: The Further Development of Rural Financial Markets – A Strategy for Ukraine.
Kyiv, May 2001.
SEDIK, D.J. (2000): Farm Profits and Agricultural Policies in Ukraine. Iowa State University Ukrainian Agricultural Policy Project. Working Paper Number 8.
STRIEWE, L.; J.-P. LOY & U. KOESTER (1996): Analyse und Beurteilung der einzelbetrieblichen Investitionsförderung in Schleswig-Holstein. Agrarwirtschaft 45, Heft 12, S. 423-434 (1996).
SULTAN, K.M. & D.G. MISHEV (1999): Role of the Financial System in Economic Growth in Transition Economies – The Case of Ukraine’s Banking System. HIID-Kyiv, Working Paper Series, Volume 1.
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5 Towards a More Market-Driven Strategy for Agricultural Reform in Ukraine
DON VAN ATTA1
1 Introduction
Ukrainian agricultural reforms trace their origins to changes in agricultural policy throughout the USSR beginning in the mid-1980s. Like the rest of Mikhail Gorbachev’s perestroika, agricul-tural reforms were presented as a way to fix minor problems in the existing system, not as a radical alternative to it. So, some thirteen years ago, the USSR began a hesitant transition to a market econ-omy by legalising some small businesses.2 Eleven years ago, the Soviet Union adopted a “Law on Land” allowing its then-constituent republics – now independent countries – to give land parcels to qualified persons to start individual farms.3 Ten years ago, the USSR fell apart, in part under the pressure of a collapsing agricultural system which it could no longer afford to subsidise.4 Nine years ago, independent Ukraine mandated the restructuring of the collective and state farms.5
Ukrainian agriculture today is still dominated by a division between very large production agricultural units descended from collective and state farms that produce most grains and oilseeds, and very small household plots which produce most livestock products and provide subsistence for the rural population.6 With few exceptions, neither large farms nor small plots have really begun to approach international levels of productivity or competitiveness, although some of them may have come closer to the frontier of their theoretical technical efficiency than they were under the Soviet regime.7 In any case, aggregate physical agricultural production has fallen steadily in Ukraine since 1990.8
1 The author is solely responsible for the opinions and analyses expressed in this paper. They do not necessarily repre-sent the views of the Institute for Policy Reform, Iowa State University, the US Agency for International Develop-ment, the World Bank, or the Secretariat or Policy Analysis Unit of the Presidential Commission on Agrarian Policy of Ukraine.
2 USSR Law on Co-operatives, PRAVDA (June 8, 1988).
3 PRAVDA (March 7, 1990). The then union-republics were to bring existing land codes into compliance with this law.
Thus, Ukraine adopted a new Land Code in December 1990. The text, with later amendments, is in State Committee of Ukraine on Land Relations, Zemel’ni vidnosyny v Ukraini: Zakonodavchi akty i normatyvni dokumenty (Kyiv:
“Urozhay”: 1998), p. 31-83.
4 Vasilii Starodubtsev, then a leading spokesman for the 'collective farm lobby' and now governor of Tula oblast, got into a shouting match with USSR President Gorbachev in May 1990 when Starodubtsev demanded that all state in-vestment should be devoted to agriculture in order to solve the country’s food-supply crisis. Starodubtsev was later a member of the State Committee on the State of Emergency, the group whose attempt at a military coup against pere-stroika led directly to the collapse of the USSR. His stated reason for joining was that state direction was needed to provide agriculture with the labour and other resources needed for successfully completing the year’s harvest.
5 “Law of Ukraine on the Collective Agricultural Enterprise” (February 14, 1992).
6 See chapter 13 on Evolution of Farm Structures in Ukraine.
7 Technical efficiency for Ukrainian farms as a whole declined in the early and mid-1990s (for instance, KURKALOVA &
JENSEN, 1996). Technical efficiency in farms which have undergone restructuring by any of the donor projects in Ukraine appears to have improved relative to unrestructured farms, but a recent World Bank study (see LERMAN &
CSAKI, 2000, p. 49) cautions that “the average technical efficiency index is quite low even for the reorganised farms (0.7 out of the maximum achievable value of 1) which implies that very few reorganised farms actually attain the effi-cient frontier and most of them lie at a considerable distance from the frontier.”
8 See appendix tables at the end of this book.
The major legislative 'success' of recent years, adoption of Ukrainian Presidential Decree No. 1529 on farm reform on December 3, 1999,9 effectively completed the reorganisation of the existing large former collective and state farms that began with the 1992 Law on Collective Agricul-ture Enterprises. This leaves Ukrainian agriculAgricul-ture, in a legal and organisational sense, where Rus-sian reform had been at the end of April 1993 when a similar El’tsin reform decree was reported fulfilled. Although Ukrainian gross agricultural output has grown in 2000, contributing to the in-crease in overall GDP, there are indications that much of the inin-crease in agricultural output was due to price rather than volume effects as the country shifted from an export to an import situation for key agricultural products.10
Many of the problems of agricultural reform in Ukraine are not specific to that sector: a highly imperfect legal system and general lack of respect for contracts, a weak banking system and other more general difficulties hobble agricultural reform. However, even given these general diffi-culties, there is general agreement among Ukrainian and foreign observers that the country’s agricul-tural reforms since 1991 have been less than completely successful. But Ukrainian and foreign commentators disagree on the reasons for this poor performance and so draw quite different conclu-sions. Ukrainian policy-makers frequently argue that the design of their economic reforms, including the agrarian reforms, is correct, but they are being poorly implemented.11 They often assert that the major difficulty they have encountered is the unwillingness of international donors to provide enough funding to make the reforms work.12 Some American opinion leaders argue that aid to Ukrainian agriculture should end. As an evaluation of the USAID-sponsored Ukrainian Agricultural Policy Project carried out in 2000 noted, “Since 1994, 75,000,000 US$ has been allocated to agri-culture projects, particularly the agrobusiness and land reform sectors. The results have been gen-erally disappointing. Consequently, questions are now being raised concerning whether or not USAID should even be involved in the Ukrainian agriculture sector.”13
The agricultural sector is too important to Ukrainian development to be abandoned by donors and reformers. As one of the first areas in the Russian empire to be industrialised, much of Ukraine is endowed with antiquated industrial enterprises and played-out mines. Because of the patterns of development enforced by planners in Moscow, much of its more modern industry and potentially competitive high-tech, often defence-oriented, industry can function effectively only in combination with enterprises now located in other countries of the former Soviet Union. Ukraine’s one certain comparative advantage, a result both of its geographical location and its natural endowment, is in agriculture. Almost 70% of Ukraine’s surface area is agricultural land. The agricultural sector em-ploys one third of the labour force and generates some 11% to 12% of Ukraine’s GDP. Moreover, garden plots worked by urban families and household plots cultivated by rural residents represent important sources of food as well as, in effect, serving as 'welfare in kind' for the substantial elderly and un- or underemployed population. For these reasons, adopting a reform strategy in Ukraine that mimics the strategy in the Russian Federation, where attention focused on raw material extraction and processing during the 1990s, with lesser attention to the military-industrial complex and a sense that agriculture had to be left for later, will not work.
9 Ukrainian Presidential Decree No. 1529/99, “On immediate measures to accelerate the reform of the agrarian sector of the economy” (Holos Ukrainy, December 7, 1999). On the results of the Decree, see chapter 13 on Evolution of Farm Structures in Ukraine.
10 See chapter 7 on Price Determination and Government Policy on Ukrainian Grain Markets.
11 For instance, in a March, 1997 state of the nation report to the Ukrainian Verkhovna Rada (parliament), Ukrainian President Leonid Kuchma asserted that the reform ideas that had been adopted were correct, but their implementation had been done inefficiently and even corruptly. “Kuchma blasts Lazarenko’s cabinet,” Kyiv Post (March 27-April 2, 1997), p. 1.
12 Author’s interviews.
13 “Abridged Version Of An Evaluation Of The Ukrainian Agricultural Policy Project: Co-operative Agreement No.
NIS-A-00-97-00005-00” (February 2000), p. 7.
In this chapter I argue that the reasons for inadequate Ukrainian agricultural reform are both conceptual and operational. Ukrainian policy-makers and foreign advisors hold conflicting concepts of what agricultural reform should accomplish. Moreover, attempts at agricultural reform, however defined, have been implemented in a top-down way that is characteristic of the Soviet command system and, thus, incompatible with attempts to dismantle that system.