Chapter V.5 Agriculture
- International Monetary Fund
- Published Date:
- December 1991
Agriculture is a key economic sector in the USSR accounting for about 20 percent of GDP and 18 percent of employment. Over 100 million people or about one third of the country’s population depend directly or indirectly on the sector for their livelihood. The area cultivated—from the fertile “black-soils” in the center of the country to poorer quality soils to the north and the irrigated lands in the south—covers about 230 million hectares, giving the USSR the most extensive land wealth of any country in the world. Most of the land is planted in grains and fodder crops, while overall, half the value of production comes from livestock products. Ninety-seven percent of the land is farmed in the public sector, about equally in large state or collective farms. In spite of the highly favorable resource endowment, the USSR is a net importer of food, with imports averaging just under US$20 billion per year, of which about one half is grains and sugar.
Soviet agriculture is at a critical juncture. The recent deterioration in agricultural marketing has compounded the chronic problems of the sector: inefficiencies in production and processing, deficiencies in distribution and waste at all stages between producers and consumers, and low returns to investment. The deterioration in marketing is due in part to fragmentation of the political and economic linkages of the administrative command system, and in part to the decline in the willingness of farms and processors to accept fixed government prices and rubles for transactions. The result has been shortages in cities and the growth of autarky and barter. Availability of food in Moscow, Leningrad, and the industrial cities of the Urals was lower than average in the fall of 1990, and supply was expected to deteriorate further in the winter and spring of 1991. Moreover, the rupture of internal trade has interrupted delivery of packaging materials and loss of perishable crops has increased. These problems are compounded by inflationary pressures caused in part by the growth in food subsidies, which have now reached 12 percent of GDP and, with recent procurement price increases and fixed retail prices, could attain 20 percent of GDP in the coming year.
The visible worsening in the food economy came paradoxically at a time when the grain harvest, estimated at about 220 million tons, was exceptionally good (due to extremely favorable weather). The growing food shortages amidst unusually abundant supply and dramatic increases in food subsidies illustrate the extent to which the chronic problems of the traditional command structure have intensified.
The problems in the food economy, although visible before, deepened in the 1980s. When corrected for fluctuations in weather, grain production in the late 1980s did not increase much above the 1976-1980 average levels despite high levels of investment. Meanwhile the costs of production, even crudely calculated without true account of capital costs, nearly doubled. Imports of grains grew over the same period from about 22 million to just under 40 million metric tons. Although difficult to estimate, the growth of value added in agriculture has been well below general economic growth and according to official statistics averaged about 1.5 percent during the 1980s (Table A.4, Appendix II-1). Losses are officially estimated to be between 20 and 30 percent of production for grains and even to exceed 40 percent for perishable commodities. In mid-1990, the poor financial status of most farms and processing units forced the government to forgive rub 73 billion of debt to the agro-industrial complex and more debt forgiveness is expected shortly.
The chronic problems of the sector are rooted in the structure and incentives governing production and processing. Over the last 25 years, growth in production has occurred under the centrally planned system, but at high cost, both to the budget and in terms of foregone opportunities to produce and consume other goods and services. Because prices and costs have had little economic meaning, the command structure has resulted in misallocation, waste, and destruction of the environment through overuse of inputs. Neither managers nor workers on state and collective farms have strong incentives to improve productivity, reduce costs, or preserve capital and land. Wages are standardized and state quotas at fixed prices determine the allocation of resources. Furthermore, prices are set such as to penalize low cost producers. Inputs are also assigned and farm managers have little choice over quantities, quality or timeliness of delivery. The state monopolies that supply inputs and process outputs have little incentive to serve either the farm’s or the public’s interest. If costs exceed revenues, the state usually offers financial relief either through the budget or the banks.
The Government, having invested heavily in the sector for decades and experimented with various reforms—from brigades to leasing—has come to the conclusion that the sector’s problems cannot be solved under the current structure of central command. The solutions to the food economy’s problems lie not in tinkering with the existing system but in a radical restructuring of the agricultural economy and the economic incentives which govern it. In most circles of policymaking, the debate is not whether to carry out reforms but about their sequencing and depth. Major issues being discussed are whether to continue to administer some prices or fully liberalize prices and whether to permit private land ownership.
The prospects for success in a radical reform of the sector are favorable. The natural resource base of Soviet agriculture is rich, the people employed in agriculture relatively well educated and skilled, and the physical infrastructure, although inadequate, provides a foundation on which improvements can be made. The potential for growth in the sector, through improving the use and allocation of existing resources, is very substantial. Moreover, agricultural growth may be achievable before improvements in industry are realized and may therefore provide early tangible evidence of the fruits of reform to a market economy. But the political problems are formidable. The steps needed to realize this potential challenge deeply-rooted beliefs concerning the role of the state and its ownership of land and industry. It would also require a major retail price reform that, during the transition, may adversely affect some segments of the population. But there are few, if any, alternatives.
This chapter focuses on three critical issues—price reform, privatization, and credit and investment—and suggests a strategy for dealing with these priority areas of policy. The suggestions in each area recognize that Soviet agricultural potential can only be realized through a decisive break with the past. Studies of the political and economic process of reform in other countries indicate that upfront action must be substantial to demonstrate to investors and the public that the government’s commitment to the reform process is strong. Fundamental to the proposed strategy is a clear repudiation of the inherited institutions of collectivized agriculture through the liberalization of prices, the ending of state orders, and the establishment of full private ownership of land (or a form of user rights that equivalently bestows the rights of ownership). The state would continue to play an important role, however, by providing and enforcing the legal framework to underpin a largely private agricultural economy, in reducing price uncertainty associated with the transition to a very different relative price structure in agriculture, in funding investments in public infrastructure, and in establishing a social safety net in rural and urban areas. In other words, the role of the state would need to be redefined from one of control and ownership of production, processing and distribution to one of support for private farming and the market.
The proposed strategy for the agricultural transition shares many elements in common with the presidential guidelines. It deviates most from the current range of debate in the USSR in the sequencing of price reform through emphasizing the immediate need for rapid liberalization of prices, including retail food prices. Retail price liberalization is proposed along with instruments to increase the acceptability of higher food prices to consumers, and to spare vulnerable groups of the population from hardship. The proposed strategy also differs in emphasizing the dependence of the sector’s future growth on the introduction of full private ownership of land. The proposed land reform to private individual or cooperative ownership, however, is phased, and its pace is somewhat cautious.
The overall strategy for the transition in agriculture includes the following elements:
- (1) Price liberalization and the termination of state orders which would in part be replaced by selective purchases by the state;
- (2) Creation of a safety net to cushion the impact of higher food prices on vulnerable groups;
- (3) Demonopolization of agricultural trade and gradual removal of non-tariff barriers to foreign trade in agricultural products;
- (4) Phased withdrawal of the state from the direct provision of agricultural inputs and rural construction materials;
- (5) Privatization (through establishing individual, joint stock or cooperative ownership) of most processing, wholesale and retail trade in food, and small-scale transport (mainly trucks);
- (6) Land reform, through the disbanding of state and collective farms and the establishing of private individual or cooperative farms with the legal rights of full private ownership of land. This includes establishing either separate cooperatives or joint stockholding companies for the service assets (tractors and buildings) or their sale to farmers;
- (7) Reform of agricultural credit and establishing new criteria for agricultural investment and procedures for evaluating alternative investments. Implementation of infrastructural investments and financial systems with at least partial recovery of their costs;
- (8) Creation of an inter-republic council, with participation of the international community, to monitor changes in food supply throughout the USSR and to channel any international logistical support (in the form of targeted commodity shipments) for the transition to a market oriented agricultural economy;
- (9) Technical and financial assistance to the union and the republics during the transition. Broad areas for technical assistance would be banking and credit, project and economic analysis, trade systems and policy, food monitoring, and management and marketing of agro-industry. Investments in rural infrastructure and agro-industry will need to be substantial. In particular, rural roads and communications are required for efficient distribution and marketing. Irrigation and drainage systems need to be upgraded and improved in efficiency. Priorities and directions for public investments will have to be established through a comprehensive review of investment needs.
2. PRICING AND SUBSIDIES
Most agricultural and food prices at the retail, wholesale and farm level are controlled centrally. Retail prices for many foods have been held nearly constant since the early 1960s, while costs of production and procurement prices have risen substantially. Subsidies paid out of the budget to cover the difference between low retail prices and higher farm prices have increased dramatically, and were estimated at rub 115 billion in 1990. The growing gap between official prices and free market prices makes it increasingly difficult for consumers to buy food through the state network, and costly alternative distribution networks, including barter, are displacing ordinary purchases of food. Procurement prices have been set based upon costs of production and enforced through state orders (compulsory sales to the state). Besides misallocating resources, this pricing policy has greatly reduced incentives to reduce costs of production. Although the retail price controls are the most damaging to the budget, the system of procurement prices and state orders are the most distortionary for agricultural production.
a. Producer prices
Agricultural producers sell output for three kinds of prices: procurement prices, negotiated prices, and free market prices. Procurement prices are established by the central government for specific products and are differentiated by geographic region. The procurement price consists of a base price plus a number of bonuses that depend on quantity, quality, and financial need. Weak state and collective farms receive price bonuses in an effort to improve their financial position. Private producers who market through the state usually receive base procurement prices without bonuses.
Most sales to the state in fulfillment of mandatory state orders are made at these procurement prices, including bonuses. State orders still cover a large portion of most commodities except potatoes and vegetables. Farms have been increasingly reluctant, however, to deliver products in fulfillment of state orders, and many orders were reported unfilled in the fall of 1990.
A presidential decree in January 1991 reaffirmed the obligatory nature of state orders, and asserted that all producers of marketed agricultural output would be subject to state orders. According to the decree, commodities delivered under state orders would be purchased at established procurement prices. Remaining output could be marketed freely.
Negotiated prices are used primarily for (1) sales to the state of quantities in excess of state orders, and (2) direct inter-enterprise trade. The official consumer cooperative, Centrosoyuz, has traditionally been the major single purchaser at negotiated prices. Centrosoyuz buys from individuals or farms, processes, and resells at prices higher than state retail prices. Negotiated prices are determined in bilateral discussions between buyer and seller when the contract is written. Although the organization is formally a consumer cooperative, and individuals in rural areas buy shares in order to use the services of Centrosoyuz, its activities have been highly regulated by the state, and shareholders have not participated in management.
Quantities of most commodities sold under negotiated prices are small. For potatoes and vegetables, however, all state orders were dropped in 1990, and all produce sold either to the state or between enterprises is now at negotiated prices. The state procurement price for potatoes in 1989 was on average 20 kopeks per kilo. Negotiated prices in early 1990 were reported to range from 35 to 55 kopeks per kilo, with even higher prices appearing in the fall when the potato harvest was uncertain. Negotiated prices generally fall between procurement prices and free market prices.
Products sold directly to consumers on the free or collective farm markets are exchanged at market clearing prices. Local councils have authority to enforce price ceilings, but do so only in exceptional cases, since it is widely expected that prices on the collective farm markets will be higher than in state outlets. Sellers must market their output directly; no paid intermediation is allowed. An individual who does not want to market his or her product directly must sell through the local state or collective farm, or turn to Centrosoyuz. In 1989, the small scale cooperatives that comprise the growing private sector in industry, trade, and services were explicitly denied the right to trade in food, although they can still engage in public catering. Sales on collective farm markets are usually in small lots, and the costs of retailing are high.
State procurement prices and state orders dominate farm level prices, and these are the best indicators of actual prices received for most commodities. Average procurement prices for major commodities for 1986-89 are shown in Table V.5.1 in rubles per ton. Reference world market prices for some commodities are also shown for 1989, although the available data do not allow quality comparisons. The Soviet farm level prices in 1-990 (taking into account the doubling of grain prices in May 1990) embody an implicit exchange rate of approximately rub 2-2.5 to the dollar. These average prices conceal a wide range of variation around the mean, and more efficient producers in areas with comparative advantage in a particular commodity received considerably less than the national average price. For example, although the national average price for milk in 1988 was rub 525 per ton, producers in Lithuania and Estonia received rub 371 per ton, while producers in RSFSR received on average rub 644 per ton.
|State and Collective Farms||Individual Farmers|
World price for cotton is quoted for cotton fiber. Soviet price is for seed cotton. Fiber is approximately 32 percent seed cotton by weight in the USSR.
World price for cotton is quoted for cotton fiber. Soviet price is for seed cotton. Fiber is approximately 32 percent seed cotton by weight in the USSR.
Multiple exchange rates and restrictions on convertibility have made it difficult to compare domestic prices with world prices. Average domestic producer prices are lower than world market prices at the tourist rate of about rub 6 to the dollar, but higher than world prices at the commercial exchange rate of about rub 1.66 to the dollar. The extent to which the current price structure taxes producers, however, cannot be judged by looking at nominal rates of protection, or even effective rates of protection. Explicit subsidies on fertilizer and machinery have been discontinued, but prices of these inputs are still low except at the overvalued official exchange rate. Furthermore, the price system has in the past been only one way in which farms received resources. Flows through the budget and the banking system have also been important.
b. Retail prices
Food products in the USSR are sold through three channels: state retail stores, state-dominated cooperative markets, and farmers’ markets. Retail prices are fixed in the state stores, negotiated and administratively controlled in the cooperative markets, and free in the farmers’ markets. About 70 percent of food purchases are normally made at state retail outlets, although this percentage has probably declined because of recent shortages.
Retail prices for food products sold through state retail trade are set centrally and differentiated for three broad geographic zones of the country. These prices have been changed little since the early 1960s, although there have been substantial increases for particular items, such as alcohol, fruit, and coffee, and introduction of new products with higher prices. State prices vary little seasonally, and do not capture well the different qualities of the same basic commodity, such as, for example, beef of different cuts.
Higher prices generated on the parallel market and the growing shortages in state stores have put pressure on official retail prices. Many consumers indirectly pay more than official prices for food purchased in state stores, although these additional costs are rarely recorded in family budget surveys. Some of the higher cost is in household time allocated to searching and waiting in lines for food. Direct and indirect payments and reciprocal favors to clerks and store managers raise the real cost of subsidized food, as do tied sales and quality degradation. For most commodities in many localities, the actual prices that consumers effectively pay in state outlets fall somewhere between official and parallel market prices.
Retail trade in food is also conducted through Centrosoyuz, at administered prices. Centrosoyuz operates most retail stores in rural areas, and has outlets in some urban areas, as well. Approximately 25 percent of retail trade in food passes through the cooperative network (23 percent when aggregated at state prices). Centrosoyuz buys directly from farms and households, processes and then resells either to peasants or urban dwellers. If the raw materials in the product were purchased at state procurement prices, Centrosoyuz is supposed to resell the processed product at state retail prices, and is subsidized for the difference. If the raw material was purchased directly from households or from farms at negotiated prices, then the product can be sold at a higher price.
As a consequence of the pricing policy of Centrosoyuz and its dominance in retail trade in rural areas, most food products in rural stores have higher prices than in urban areas, and farm families travel to the city to buy back the food they produced. For example, in 1990, meat in state stores cost approximately rub 2 per kilo if it was available. In the cooperative stores it was approximately rub 5 per kilo, and in the collective farm market, from rub 8-20 per kilo, depending on market conditions and excess demand.
In 1989 the union government relinquished control of producer and retail prices for potatoes and vegetables, and stopped paying a subsidy from the central budget. State orders were retained, to be filled at negotiated prices. Local councils received authority to regulate retail prices if they so chose, and to pay a subsidy from their own funds. Potatoes and vegetables were thus subjected to a hybrid form of price regulation, and the effects in the 1990 season were quite damaging. Local councils imposed price ceilings, but had limited funds for subsidies. As a consequence, they depressed producer prices to levels at which it was in some cases uneconomical to harvest and transport the crops. The new form of price regulation, combined with poor harvest weather and a shortage of drafted labor traditionally used to bring in the crop, complicated the 1990 potato and vegetable harvest. This type of problem could easily recur with other commodities if centralized subsidies are removed and local councils have the authority to impose retail price ceilings.
Besides the administered channels of state stores and cooperatives, consumers can also buy food at market prices at collective farm markets. Meat and many other food commodities are available there even when state stores are empty. These markets are important indicators of changes in market conditions, since they are the only fully legal parallel markets with flexible prices. For most commodities, however, they are very thin markets, and a small proportion of total volume flows through them, as shown in Table V.5.2. In 1988, they handled a significant volume only of potatoes (34 percent of trade by volume), vegetables (13 percent) and fruit. Only 3 percent of all meat was sold in these markets. The relative importance of free markets varies geographically; they tend to carry a higher proportion of total trade in food in the Ukraine and southern cities than they do in the RSFSR and the North. In Odessa, 28 percent of marketed meat was sold in 1988 on the collective farm market, while in Moscow only 0.5 percent of meat (by volume) was sold in this manner. Approximately five percent of total trade in food has moved traditionally at free prices through the collective farm markets. When all trade in food is aggregated at official state prices, the relative share of these markets falls to about 2 percent.
|(Thousand tons)||(Percent of total trade in food by volume)|
The worsening shortages of the past year have brought increasing numbers of more affluent consumers to collective farm markets. The proportion of trade in food that passes through the collective farm market had been declining over the post-War period, but the recent worsening shortages have increased trade in some commodities. Sales of pork on collective farm markets increased in the first half of 1990 by 15 percent compared to the first half of 1989, while sales of mutton rose by 29 percent; other products registered much smaller increases, however, and there were declines in several products.
c. Budgetary subsidies
In the 1980s, the increasing difference between higher procurement prices and nearly constant official retail prices led to substantial and growing direct budgetary subsidies from the union government (Table V.5.3). In 1990, the subsidy was budgeted to cost rub 96 billion, but was estimated to have amounted in fact to some rub 115 billion or approximately 12 percent of GDP. Food subsidies increased further in 1990, as grain procurement prices were doubled and meat prices raised by about 35 percent; increases for other products took effect in January 1991. Large and growing food subsidies have many deleterious effects on the agricultural economy. Agriculture, through the subsidy and the monetization of the budget deficit, both contributes to and is victimized by the consequent growth in the monetary overhang and the deterioration of the ruble. Agricultural producers, uncertain whether they will be able to dispose of their rubles, withhold sales in favor either of costly barter trade or additions to inventory. The growing wedge between official prices and market prices generates large economic rents and corresponding activities to capture the rents, such as the reported increased presence of organized crime in wholesale food trade. Excess demand shows up immediately in food markets, depleting shelves in grocery stores and pushing up prices on the free market. Consumers are less aware of the apparent improvement in aggregate per capita consumption that has taken place since 1985 (Table V.5.4) than they are of the increasing shortages and difficulties in obtaining food.
Annual Percentage Growth
|Percentage of state expenditure||2.1||3.2||7.8||9.2||8.1||14.5||18.0||…|
Budgeted subsidies for 1990 were rub 95.9 billion. Actual expenditures were estimated at rub 115 billion, due to producer price increases at mid-year.
Budgeted subsidies for 1990 were rub 95.9 billion. Actual expenditures were estimated at rub 115 billion, due to producer price increases at mid-year.
|Milk & dairy in milk equivalent|
All costs of delivering a more highly processed, better marketed product must be borne by the budget as long as retail prices are fixed, and this has been an effective brake on investment in food processing. The growing subsidies and unwillingness to raise retail prices have thus thwarted much needed improvements in the quality of food sold and the service embodied in the final good. The transition in food marketing that normally would have been expected to accompany income growth and urbanization over the past two decades did not happen. The backwardness of food processing and retailing is a direct consequence of retail price policy.
Low retail prices and uncertain supply at those prices encourage consumers and public caterers to keep excessive inventories, with resulting waste. The means of payment of the subsidy stimulated waste; processors paid for raw materials at a low price that already reflected the subsidy, and hence could write off waste and loss at a low price. This pricing policy also encouraged diversion of product that might be classified as waste to the black market. A decision was taken several years ago to require processors to pay the higher price for raw materials and receive a subsidy only for the actual volume that survived processing, but it was never implemented.
An effort to change the means of the subsidy payment contributed to uncertainty in meat marketing during 1989 and 1990, and may have accounted for some reduction in deliveries of meat to the all-union fund (a fund for commodities that enter trade through central allocation). Republics delivering meat to the all-union fund were traditionally reimbursed for the full cost of the subsidy incurred during processing. During 1989, efforts were begun to shift the cost of the subsidy from the all-union budget to the republican budgets according to the place of consumption. The issue, however, is not yet resolved, and in late 1990 subsidy funds were still flowing from the central budget.
Food subsidies exceed government expenditures for health and education,1and the safety net of social welfare programs—including unemployment insurance for the unemployed and welfare for the marginally employed—which will be needed during the transition, will be difficult to finance unless the pressure of agriculture on the budget is relieved. But the food subsidy has been considered by many as a substitute for an explicit safety net to meet the nutritional needs of vulnerable consumers. Approximately half of the total subsidy is delivered through one commodity (meat), and a quarter is delivered through milk and other dairy products. The distribution of consumption of these two commodities demonstrates the subsidies’ regressive nature. Throughout the USSR, per capita consumption of highly subsidized commodities is greater in urban than in rural areas, and is higher in richer than in poorer areas. This is not surprising, since meat has a high income elasticity. Furthermore, the subsidy is greatest for products sold in state stores, and these stores are located predominantly in urban areas. Almost one third of all meat sold in state and cooperative trade is consumed in cafeterias, restaurants, schools, and other outlets of public catering, and this goes predominantly to the urban population. State employees spend on average 12 percent of their food budget in public catering, while collective farm families spend just over 3 percent.
More refined data would be needed to assess the degree to which urban poor people have access to subsidized meat and milk. Access is likely to be different in regions that are net exporters of meat from those that are net importers. In Lithuania, which has high per capita production and consumption of meat and is a net exporter, meat consumption has been found to rise with income; and urban people with higher incomes pay somewhat more for meat than do those with low incomes (see Table V.5.5). Even in Lithuania, however, where the urban poor have much better access to subsidized meat than do poor people in the rest of the USSR, the meat subsidy is regressive: higher income people receive more subsidy than do the poor. The same is true in Lithuania for dairy products and for all subsidized food: per capita consumption and the subsidy rise with income class. Evidence from regions of the USSR that are net importers of meat suggest that those with higher incomes actually pay less per unit for meat because they have better access to the trade channels through which subsidized meat is distributed.
|State Employees||Collective Farm Members|
meat subsidy 1
meat subsidy 1
Assuming state expenditures of approximately rub 6 per kilogram. Estimated subsidy for collective farm members is not calculated, since the proportion of purchases from subsidized sources is unknown.
Assuming state expenditures of approximately rub 6 per kilogram. Estimated subsidy for collective farm members is not calculated, since the proportion of purchases from subsidized sources is unknown.
3. THE REFORM OF PRICING POLICY AND REDUCTION OF SUBSIDIES
a. The case for price liberalization
In principle, the Government has a choice during the transition to continue to administer retail and producer food prices or decisively to decontrol them. Although retail prices could in principle be raised (to reduce the level of the food subsidy) while remaining under administrative control, experience in many countries has demonstrated that administering prices in an inflationary environment is nearly impossible. The effort results in shortages as suppliers withhold commodities in anticipation of further price rises and eventually leads once again to growing budgetary subsidies.
In the Soviet context, continuation of administrative prices also has a deeper consequence. Administered prices would mean that the command structure and control of farming and agro-industry would most likely continue. Control of prices puts the government in the center of every adjustment and vulnerable to political pressure to maintain low food prices for consumers. If the Government attempted to control only retail prices while freeing wholesale and producer prices, the actual outcome could be the expansion of subsidies as each administrative retail price increase faced political opposition. Because of the poor technical and managerial state of the agro-industry, it would also be nearly impossible for the government to discern whether the subsidies were actually keeping retail prices low or simply funding inefficiencies. To control the growth of subsidies, the reinstatement of controls on wholesale and producer prices would probably be unavoidable. With price controls in place, investment in the sector would be delayed as it is unlikely that investors in the agro-industry or private farmers would place their economic fate in the hands of a government that set food prices with a potentially volatile urban population in the background. Finally, without a clear signal on producer and wholesale pricing, farmers and processors cannot determine the potential value of privatized assets in agriculture. In other words, agricultural and agro-industrial restructuring and privatization would be retarded and distorted under politically controlled prices. Postponing the liberalization of basic food prices until the end of the economic reform, as is now being proposed in the USSR, would condemn the agricultural sector to the status quo for at least several years. It would also mean foregoing the possibility of a rapid supply side response in the agricultural and food economy in the early stage of the transition to a market economy.
The increasing difficulty in enforcing price controls provides a further justification for immediate price liberalization. Price controls and regulations are irrelevant if they cannot be generally enforced and they can become perverse if enforced in a random or differential way. With the general erosion of central economic controls, the instruments for enforcing central control of prices have also weakened. Decisions on pricing and subsidies are increasingly being taken independently by republics and local governments, and more producers are engaging directly in barter transactions. The appearance of barriers to trade within the country, such as Ukrainian restrictions on the export of food across the republic’s borders, were due in part to the distortions in regulated agricultural prices.
The only really viable step, despite its obvious political difficulties, is the freeing of agricultural prices at all levels. The rationale for price liberalization lies in eliminating the increasing inefficiencies in production and processing caused by a highly distorted price structure, in redressing the regressive nature of the food subsidy and its continuing pressure on the government’s budget, and in countering the high costs associated with barter trade (arising in part out of attempts to avoid price controls). Furthermore, food will not be reliably available in stores until retail prices are liberalized; continued food shortages in the cities, possibly more than any other economic problem, visibly undermine public confidence in the potential strength of the economy and the reform process. It is imperative that food return to the stores in the first stage of the economic transition. Because the needed adjustment in prices rises with each step in inflation, price liberalization cannot be delayed for long. But because the price increases necessary to keep food in the stores will impose hardship on many people with low or fixed incomes, a compensatory scheme to buffer some of the consequences of the price increases must accompany liberalization (see section c).
Under price liberalization, the Government can play two important roles. It can signal the new relative price structure by offering to buy stated quantities of grains and oilseeds for announced prices linked to world prices. Along with local governments, it can also maintain the compensatory program to cushion the impact of retail price liberalization on vulnerable consumers.
b. A new procurement policy
Under a reformed procurement policy and during the transition, government purchases (but not through state orders) could provide producers with signals of new relative prices, and could offer a secure outlet for a proportion of agricultural production at announced prices. Fully liberalized producer prices at the beginning of the transitional period would probably bear little resemblance to world market prices, or to prices that will prevail after the transition is completed. As the result of the decline of traditional links with the state procurement apparatus, the rise in trade barriers within the country, and the deterioration in the monetary economy and rise of barter trade, quite different market clearing prices unrelated to transport and distribution costs could arise within a geographic area and throughout the country. These prices would, however, be artifacts of the transition process, and would not convey the information needed for investment and production decisions in the longer term. It is also possible that producers could react to the uncertainty of these prices by withdrawing in part from the commercial food economy, producing for their own needs, and waiting until the confusion subsides.
Procurement price policy during the transition should allow producers freedom to market as they wish, but should inject information about world prices into the trading system. In order to increase the amount of information and provide incentives to market, the state should extend an offer to buy a stated quantity of grain and oilseeds at announced prices and locations. No producer would be obligated to sign a contract with the state; all compulsory state orders would be dropped. Producers would have an opportunity, however, to sell forward some or all of their output if they chose to. The announced price would not, however, be a minimum price; the Government is unlikely to have the financial resources to defend a minimum price in the face of possible market uncertainties. Instead, it could extend offers to procure fixed quantities at a price that could fluctuate with world prices. The announced prices would be adjusted for transportation differentials at the location of purchase. Because the transitional period may be one of high inflation, a formula could be chosen to link the announced price to movements in the auction rate of exchange between the ruble and the dollar until a better market exchange rate emerges. The auction rate itself could not be used because it is too high to underpin producer prices.
For sugar beets, the Government should not buy directly, but should establish a minimum reference price for their purchase by factories. This price should be differentiated by quality and distance and again related to world prices by the linked exchange rate (the linkage necessarily would need to be loose because of the peculiarities of the international sugar market). During the transition period, the Government could also release imported sugar onto the market at auction prices.
For meat, milk, and other perishables such as vegetables and potatoes, the Government should not attempt to influence producer prices. Seasonality and quality differences make regulation of these commodities difficult.
Accompanying the price liberalization should be the demonopolization of trade and opening of the borders to agricultural and other commodity trade. With greater openness in international trade, prices of agricultural tradables would be increasingly influenced by international prices; border measures, principally tariffs, could be used for price support instead of direct government purchases.
c. Compensation for retail price increases
Retail price liberalization is an essential component of the initial stage of the agricultural transition. But it must be accompanied by a compensation program to cushion the impact on consumers, particularly the poor (see Chapter IV.6). With respect to compensation for food prices in particular, a food allowance could be added to pensions, and expanded school feeding programs could reach school and preschool children and the low paid staff employed in education. Preschool children not in day care could be identified through local health clinics.
Because of the transitory nature of some of the needed compensation and the administrative difficulty of targeting direct monetary compensation, some of the compensation could be delivered in kind through direct feeding or commodity distribution programs while another large part could be delivered through food stamps or increased pensions for the old. Since many of the elderly are in rural areas, targeted assistance for the elderly should be mainly monetary. Existing school feeding programs could be expanded where feasible without much higher capital costs. Distribution in kind could reduce the budgetary burden of the compensation program (because of the implicit targeting involved in direct feeding and distribution), and the international community could make a very useful contribution through commodity donations and technical assistance. Local councils could oversee the public feeding and distribution programs. Food stamps and monetary assistance could supplement distribution in kind.
Compensation could also be targeted regionally and by commodity. Retail price liberalization would have differential regional impacts, since the subsidy is now unevenly distributed. The poorest people in rural areas now probably have little access to subsidized food except for bread. Per capita consumption of bread is highest in the poorer Southern republics, where people cannot afford many livestock products and potatoes do not grow well. Central Asian rural families spend 18-20 percent of their food budget on bread, almost twice the proportion for rural families as a whole, and they derive much of their caloric intake from bread. The greatest impact on the poor of Central Asia would therefore be through removal of the bread subsidy. People in other parts of the country would be affected, but proportionately less, by higher bread prices. By carefully designing the targeted intervention to vulnerable groups, to specific commodities (those consumed by the lower income groups) and to geographical regions, the costs of the compensation could be kept lower.
4. AGRO-INDUSTRIAL ISSUES AND PRIVATIZATION
a. Recent developments
In the past, the Soviet authorities have tried to resolve the problem of food supplies by investing enormous amounts of budgetary funds to increase agricultural production. The Food Program, launched in 1982, absorbed billions of rubles with disappointing results. Agricultural output increased only marginally and a high proportion of production is still lost each year before it reaches the consumer.
Deficiencies in pricing, transportation, storage, processing and distribution remain the major reasons for these high losses, which are estimated at about 20-30 percent of production. This is roughly equal to Soviet food imports. For certain products, such as potatoes and vegetables, the level of losses in some years amounts to as much as 40-50 percent. Soviet sources estimate that about 1 million metric tons of meat per annum—equal to the annual imports of meat—are lost because of inadequate cold storage and obsolete slaughter and processing facilities. Although figures on losses by processing enterprises may sometimes be exaggerated, particularly in the meat sector, where a significant proportion of production has been disappearing into uncontrolled channels, there is undoubtedly a high proportion of wastage. In the sugar refining industry, for example, extraction could be much improved and losses could be reduced considerably. The USSR produces about 8.5 million metric tons of sugar from a total beet crop of close to 100 million metric tons, i.e., the aggregate extraction rate is about 9 percent, while the sugar content of beet ranges, on average, around 15 percent. With fewer losses during transport, improved storage facilities for beets, and better refining technologies, the aggregate extraction rate could rise by 3-4 percentage points, i.e., 3-4 million metric tons of sugar, which comes close to the recent level of Soviet imports of about 5 million metric tons of sugar annually.
The USSR has consistently underinvested in the food processing industry. Only about 15 percent of total investment in the agricultural and agro-industrial sector has been allocated to processing industries. Two-thirds of processing equipment is obsolete and worn out, with much of the machinery dating back to the 1950s and 1960s. The current annual replacement rate is only five percent and two-thirds of processing enterprises are reportedly in need of retooling and renovation. The Soviet authorities recognize the need to invest more in food processing and in the transport and storage sectors. By reducing the present high level of losses, investment in food processing and storage could be more productive than equivalent investment in agricultural production.
To speed up modernization and development of the processing sector, the defense industries have been asked to transform part of their capacity to provide more and higher quality processing equipment. In addition, a program to improve the food industries, which is to run from 1988 to 1995 and is to involve investment of rub 77 billion, was adopted in 1988. Half of the investment is to be spent on processing machinery and the remainder on plant and storage. If fully implemented, it would mean a doubling of the average annual rate of investment in the processing sector over the 1988 level. The program is ambitious; it aims to construct 29,000 new plants and to retool and modernize another 38,000 by 1995, increasing total processing capacity by 130-150 percent/This is to include facilities for livestock slaughter, meat and dairy processing and canning and bottling of fruit and vegetables.
The program has to date met with only limited success. By late 1990, expenditure on the food processing sector was running several billion rubles behind schedule. Also, bilateral credits granted to the Soviets to import and to improve food processing technology have been only partly used, as the rate at which the USSR can absorb foreign technology in this sector appears to be limited. Furthermore, the program to divert resources from the defense industry to non-military production has met with some resistance from the defense industry itself. Overall, the commissioning of new processing capacity has been lagging behind schedule since 1988 and the priority intended for food processing has so far not been realized.
The USSR has traditionally imported agricultural inputs and machinery and equipment for the food industry from Eastern Europe and CMEA countries. Half of these imports were from the former GDR. The value of imports from the OECD area of (a) food processing machines and parts; (b) machinery for cleaning, filling and closing; (c) bottles, cans and parts; and (d) refrigerating equipment and parts amounted to only US$463 million in 1989. This figure is low when compared to total food imports from the convertible currency area, amounting to US$9 billion in the same year.
At present, most of the processing capacity is located in urban areas close to consumers and to sources of labor. This frequently leads to large losses as the raw material must be transported over long distances on bad roads. To reduce these losses, new processing installations need to be set up in rural areas. Some of the smaller processing units could be directly attached to farms, or organized as inter-farm enterprises. A relatively large number of farms already own fruit or vegetable processing facilities. Most of these installations, however, are of poor quality and need to be modernized. Another much needed improvement at the farm level is the installation of cooling systems, in particular for dairy farms. In the Orel oblast, for example, only 40 percent of dairy farms have milk cooling facilities. This not only leads to regular losses but also has a negative impact on quality.
One of the main reasons for the inefficiency and the slow progress in investment is related to the centralized command system. Fixed state orders and distorted prices leave little room for managers to decide on production and investment or to specify the kind of equipment they require to improve efficiency. Managers traditionally have avoided retooling and have sacrificed product quality in favor of continued delivery of quantities necessary for state orders. Furthermore, controlled prices have typically not taken into account transport costs or seasonality; as a result, the agro-industry is mislocated and incentives to store commodities are weak.
Such problems can only be resolved if enterprises are given more freedom to make their own economic decisions. Managers in food processing cannot at present be made responsible for any economic results, since retail prices, the price of raw materials, the product mix to be produced, and their clients are determined from above. An additional problem is that many industries are running well below full production capacity because of shortages of raw materials. Delivery quotas of raw materials, such as for the meat, milk and grain processing industries, are no longer being fully honored under the disintegrating state procurement system. Farms and other suppliers are increasingly trying to find more profitable markets where they can sell their produce at higher prices than those paid by the state and/or are withholding products as long as possible in the expectation of price increases. For example, the fine which farms have to pay at present if they do not fulfill their grain delivery quota amounts to 3 percent of the value of the non-delivered grain. Many farms prefer to pay this fine which they can easily recover from the higher prices they earn in alternative markets or through the more profitable use of their grain, i.e. for feed, or through profitable barter deals in exchange for other goods in short supply.
b. Privatization of agro-industry
Although a great deal of investment is required to increase the capacity and technological standards of the food processing industries, it is evident that any real progress will depend on more than just funding. Deregulation and privatization, together with price liberalization, will be the main compulsion to revitalize the processing sector. Managers have to be given the decision-making powers to negotiate raw material and wholesale prices, to make decisions on investment, credit and financial operations, and to become fully responsible for the economic results of their enterprise.
The privatization of a large number of processing industries would be a major element in rationalizing these enterprises, making them more profitable and reducing losses. Small processing units, such as for milk products, meat, fruit and vegetables, could be auctioned off or transformed into cooperatives. Larger enterprises, such as sugar and flour mills and oilseed crushing installations, could be transformed into joint stock companies, along the lines described in Chapter IV.2. The managers of these privatized companies will need additional training in management and financial operations. This training could take place either in the USSR or abroad, and should include some opportunities to study management methods as they are applied in comparable firms in the same sector in Western industrialized countries. Joint ventures would be another suitable form of cooperation. Thus far, only 6 percent of soviet joint ventures are in the food processing sector and there is still much room for enlarging cooperation in this field, which could include Western assistance in the design and development of food processing equipment.
c. Leasing of enterprises
Leasing of agro-industry enterprises could also be a vehicle for privatization. The leasing contract should be finite, established on the basis of the expected life of the equipment of the plant. The amount of the monthly lease should be estimated as equal to the straight line depreciation of the equipment and should be indexed for inflation in the wholesale prices of the sector in which the lessee operates. Alternatively, the Government may open bids for the leasing contracts. At the start, the Government should make it clear that it would not invest in any machinery in any enterprise in any sector—either leased or not—from that moment on. Any investment would have to be paid by the enterprise, which would also have to arrange financing. The lessees would be able to organize their operations as they see fit: as cooperatives, as joint stock companies, as limited liability enterprises, or as individual enterprises.
The lease contracts should be fully negotiable. Under a global privatization program, the Government would be forced to sell the leasing contracts to the private sector within a specified time. In this way, leases could take on additional value with the appreciation of the firm’s earnings and prospects.
The risk of the leasing process is that the lessees of state enterprises would not invest in the renewal of equipment. This could happen for two reasons. One is that the business may not be worth it. Then, it is for the better. The other reason is that they may consume all of the capital in wages or inefficiency. If this happens, their inefficiency would have created an opportunity for other entrepreneurs to establish a competitive business or to take over the existing lease at low value.
d. Input supplies and privatization
The privatization of input industries, including fertilizer and tractors and their distribution, is a broader issue related to the reforms of the industrial sector. However, it is also a critical element in assuring that supplies will be available to the farm sector. In the transitional period, a first step could involve the liberalization of the wholesale trade in inputs with some supplies being progressively sold through auction markets. Recently, explicit subsidies on fertilizer and farm equipment were removed, but excess demand for these inputs remains. These inputs should be sold directly to the market at “wholesale” centers and then distributed privately. The Government may wish to maintain a small part of the supplies (20 percent or less) for direct distribution to more remote areas of the country. The majority, however, should be sold on the free market at auction prices. Without liberalization, it is likely that inputs will remain unavailable in many parts of the country.
e. Privatization and monopolies
In the course of privatization, there will be a risk of creating private monopolies in the agro-industrial complex. The possibility of monopolization is greater at the procurement level than for sales to the retail market. At the national level, numerous enterprises are producing processed agricultural products; but at the local level, in some districts, there are few buyers of farm outputs and the poor state of transport and storage does not allow easy arbitrage between different regions.
Private monopolization raises the danger of inviting excessive or unnecessary market intervention by local or higher authorities. This should be avoided. The solution to monopsony or oligopsony buying is not simple but can be dealt with in two dimensions. The first is legal and regulatory (see Chapter IV.7). The second is economic—by ensuring that ownership is not concentrated, information on prices is readily available, trade is freely allowed and the state is willing to buy commodities selectively when noncompetitive situations arise, the problem of monopoly can be reduced. Monopolization is a possibility that should be monitored and countered, but the risks should not be exaggerated and privatization should proceed despite this danger.
5. PRIVATIZATION OF STATE AND COLLECTIVE FARMS
State and collective farms are the major organizational forms of Soviet agriculture. Prior to the reforms of the 1960s, state and collective farms differed significantly, but changes in wage policy, pricing, and investment policy have eroded these differences. In addition, many unprofitable collective farms have been reorganized as state farms, further blurring the distinction between the two forms.
Both land and assets of the state farms are owned by the state. Workers on state farms are salaried employees of the state, and have rights to the benefits available to state employees. Wages are determined according to a standardized scale, and depend little on the financial performance of the farm. State farm workers, as employees of the state, have always had rights to internal passports, and hence could freely travel within the country and seek new employment. The budget takes profits and losses of the state farm and provides most investment. State farms are free to hire labor, and face the same restrictions on dismissal as do other state enterprises.
Collective farms are not state enterprises, and are governed by a different set of regulations. As a separate legal class of Soviet citizens, collective farm workers historically had different rights than did employees of the state. Prior to 1974, they did not have the legal right to internal passports (although many did obtain passports), and their geographic and professional mobility was correspondingly restricted. Collective farm members jointly own the assets of the farm—except for land, which the state owns. They do not have an identifiable share of the owned assets, however, and therefore cannot individually sell them. The labor on collective farms must be provided by members. The farms cannot hire labor, with the exception of trained specialists and managers, few of whom would be willing to give up the higher status and benefits of state employees in order to work on collective farms. Prior to the wage reforms of 1966, earnings of collective farm members were determined as the residual after all other obligations had been met. Residual earnings depended on quotas and prices over which farms had little influence, and wages of collective farm members prior to the changes in 1966 averaged approximately one third those of state employees in all sectors.
In 1966, collective farms were urged to adopt the wage tariff of the state farms, and to take on short term debt to cover the wage bill if necessary. Collective farms were given access to sources of investment from the budget and banks that were already available to state farms. Purchase prices for state and collective farms were standardized. Since collective farm members had never had much influence in farm management, the changes of the 1960s removed most differences between collective and state farms. Highly profitable collective farms were able to retain more of their earnings than did profitable state farms, and collective farms were somewhat freer to engage in subsidiary, nonfarm activities. But few significant differences between state and collective farms remain.
Employees of state and collective farms have the right to farm a subsidiary plot. The size of the plot varies geographically with the availability of land. The maximum size under existing legislation is 0.5 hectares per family, but very few households farm a plot that large. In the USSR as a whole, only one fifth of collective farm households manages a private plot greater than 0.4 hectares. Plots are largest in the Baltic republics, and smallest in Central Asia. Most plots in RSFSR, Belorussia, and the Ukraine are between one quarter and one half hectare. The private plot is used for livestock, potatoes, and fruit and vegetables for marketing and own consumption. Since the plots are very small, most feed comes from the state or collective farms. Families use the plots very intensively for products with high value added. The fact that private plots, representing only 3 percent of planted area, contribute half of the production of potatoes and fruits, and approximately a quarter of meat, milk, eggs, wool, and vegetables reflects both the greater efficiency of the private plots, and the fact that they are used for labor-intensive, rather than land-intensive activities such as grain, oilseeds, and sugar.
A number of partial reforms of state and collective farms have been attempted in recent years, with little success. The most debilitating characteristics of the organization are poor labor incentives, limited managerial autonomy, and weak financial discipline. The introduction of the collective contract brigade in the early 1980s was an effort to improve labor discipline and incentives by linking wages of a small group of workers to the measured performance of the group as a whole. Measurement problems and the lack of stronger financial discipline caused costs of production to rise as workers used the new system to increase their wages. The introduction of lease contracting in 1987 and its official endorsement in 1989 was intended to create opportunities for private enterprise within the state and collective farms. Few farm workers took out leaseholds; farm managers did not in general encourage leasing, and the marketing relations of traditional collectivized agriculture were not supportive of private small scale farming.
The organizational structure of Soviet farms at present is thus little changed from that of the late 1960s; large state and collective fields and herds, tiny household plots, rigid wages, poor labor discipline, weak financial discipline, and little farm autonomy. Efforts to introduce marginal changes in this structure have failed. The evident weakness of this organizational form provides the argument for full scale privatization.
a. The process of privatization
Privatization in agriculture involves four kinds of assets: land, machinery and farm structures, agro-industrial facilities, and housing. To preserve equity in the distribution of the state’s assets, privatization of agricultural assets must be consistent with the strategy chosen for the economy as a whole. Equity criteria, vaguely defined but nonetheless essential to sustainability, are likely to be violated if the terms of the agricultural privatization are markedly different from those governing other sectors. Therefore, the strategy to privatize the rural areas has to be considered within a general strategy for the economy as a whole, particularly with respect to agro-industry and rural state-owned housing. But there are particular elements in the privatizing of land that make the issue of land reform and denationalization much more political and difficult. Because of this, privatization of land and farm assets should be conducted in a genuinely democratic manner, with the informed participation of the farm work force.
As in other sectors, the outcome of privatization will be a diminished role of government in the management of agricultural assets. Paradoxically, the Government must take the initiative to begin the process, keep it on course, and possibly adapt it as experience with the process develops. The procedure outlined below gives the workers on each farm the opportunity to vote either for rapid or gradual privatization. Furthermore, they can choose to manage land cooperatively or separately, to take a share of services or equipment instead of land, or to sell their share of farm assets and leave. The only choice that is foreclosed a priori is maintenance of the status quo—state and collective farms with soft budget constraints.
In developing a strategy for land reform, several issues must be addressed. These are:
(1) Should the collectives be treated differently from the state farms?
Members of collective farms formally, under existing law, have a claim on the assets of the farms—excluding land—while the workers of the state farm have no such claim. This claim could complicate privatization in several ways. Managers and workers who oppose privatization could block the process by claiming that the state cannot tell them what to do with their own assets, and thereby thwart the wishes of those who would like to operate separately.
With the quixotic price policy of the past and repeated debt forgiveness, the argument that collective farms own something that state farms do not is weak. In the six decades since collectivization, the physical boundaries of farms have been changed several times, and many collective farms have been converted to state farms. This will of necessity affect the land to labor ratios on individual farms, but the arbitrary designation of state and collective farms should not influence future patterns of resource use.
Members of both state and collective farms should be given the opportunity to choose either to remain in a restructured cooperative farm, or take their share of the farm’s assets and work independently. The state can decree that employees of state farms have this choice, since it owns all the assets and can fully determine their disposition. The decree should also be binding for collective farms.
In the Baltic republics, collectivization was relatively recent and the previous owners are more easily identifiable. If a political decision to return land to prior owners is adopted, it will complicate privatization of remaining assets. Prior owners would have to be given a deadline to present their claims, after which remaining land could be redistributed. Those who receive land through privatization must have uncontested title to it.
(2) Should land be privately owned or leased from the state?
Public ownership of land still has many adherents, even among those who recognize the inefficiency of collective management. Restrictions on ownership, however, carry economic costs. If the state retained ownership of land, but transferred clear ownership rights to other assets to the collective farmers, the farms would become autonomous production cooperatives and members would have incentives to manage their assets better. They would still be restricted, however, in the disposition of a major asset: land. Opportunities for individual enterprise would be limited. Moreover, experience in other countries indicates that efficient agricultural production cooperatives are rare. If this form of organization is imposed on the sector, it will be for ideological reasons, and not because the empirical record indicates that it works.
Leasing could be made to be almost equivalent to individual land ownership if three conditions were met. First, user rights could be granted for a long period, and enforceable fines for destroying the productive potential of land could be established. Second, user rights could be transferable, through inheritance, sale or donation. The transferability should include the possibility of mortgaging the leasing title. Third, user rights should also be divisible. That is, the lessee should be able to split the leasing title—without the consent of the lessor—and transfer one or several of the parts. This is essential to give to the market on rights the same flexibility that the markets on land have. If these three conditions were met, marketable user rights conveyed through leaseholds would be functionally equivalent to ownership, although leaseholders would probably have less confidence in their tenure than they would if they were owners. The market value of a leasehold would depend on the established rental fee.
(3) How should access to services and markets be assured?
Private farmers, whether owners or leaseholders, need access to markets for inputs and outputs. Some essential services are provided by organizations off the farms: trade organizations that distribute the inputs and buy some of the outputs; the processing plants, which constitute the primary market for many farms; and the banking system. Many services not available today would appear in a market economy, such as transportation for hire, storage, and private insurance.
Privatization of economic units outside the farms should proceed according to guidelines for the relevant sector. The commercial enterprises should be privatized as part of the service sector, and service monopolies dismantled. Processing plants should be privatized under the rules relevant to the industrial sector. The paramount objective in restructuring services and processing should be creation of a competitive environment; the transfer of public monopolies into private hands will not necessarily improve the economic environment for small scale producers.
Many services are now provided on farms. These include the storage and local distribution of inputs (gas stations, fertilizer storage and distribution), veterinary and agronomic advisory services, the collection and storage of output, and provision of machinery and transport services. The severance of such services from the farms that now hold them is important in the creation of a competitive environment and assurance of wide access to inputs and machinery. To help ensure that access to services would not be restricted for other farms, cooperative farms should not have the option to keep services inside the farming cooperative, at least in the early part of the transition. Nor should farming cooperatives be allowed to buy up the assets of service cooperatives if the purchase would reduce competition. Once administrative boundaries between farms are removed and services are separated from exclusive use by one farm, competitive supply of services would increase and cooperative farms could then purchase their own equipment. Producers dissatisfied with one provider could turn to the neighboring farm for service or purchase their own machinery. The creation of service cooperatives is important because it will take years for machinery appropriate for smaller-scale production to become widely available. In the interim, productive use of current machinery must be continued through leasing or contracting of services.
Subsidiary service activities of farms could be privatized in several ways. First, they could become specialized cooperatives delivering services such as land preparation and harvesting and providing fuel and other inputs. Membership in the cooperative should be open and its by-laws be such as to ensure transparent access to its services. Second, they could be organized as joint stock companies delivering specialized services. As such, they would abide by the laws governing other firms in the economy, including the regulation of monopoly behavior. Finally, their assets could be sold at auction to private farmers, other service cooperatives, or individuals wishing to specialize in certain services. Some private farmers might voluntarily purchase large pieces of machinery together or individually, for later rental to others.
b. The sequencing of land privatization
Experience with past Soviet agricultural campaigns shows that forcing the pace of reform in agriculture could disrupt the ability of the sector to produce. Both the process and the outcome of privatization are important. The process should serve to enhance and affirm the democratic rights of the agricultural work force. The proposed strategy aims at creating the conditions for the evolution of a market economy based on individual ownership and voluntary cooperatives, if the latter prove competitive. The strategy proposes a gradual approach whereby individuals can make voluntary choices to farm individually or cooperatively. The proposal builds on some ideas already suggested in the USSR.
The proposed procedure for land reform includes the following elements and sequences:
- (1) Issuing of a decree or legislation that ensures that state and collective farms enter the privatization process on an equal basis. Claims of prior owners should be cleared by a specific date;
- (2) Classification of assets into land and nonland assets and the creation of shares of approximately equal value for both forms of assets. In the case of land, the asset shares would identify specific contiguous land plots; in the case of nonland assets the shares would designate specific equipment or buildings;
- (3) Privatization of assets through the creation of two cooperatives, the members of which are the employees of the old farms, and the assets of which are, for one cooperative, the land and, for the other cooperative, the nonland assets of the farm;
- (4) Initial assignment by lottery of shares of both land and nonland assets to members of the new cooperative;
- (5) Voluntary trading or buying or selling of share assets among members. Individuals trade or sell shares until each has the combination of land and other assets or financial compensation desired;
- (6) Voting by land cooperative members for gradual or rapid privatization. If gradual, the cooperative structure would be retained for at least two years but with private plots and herds to be expanded by an amount to be determined by local conditions. Private plots would be tradeable or saleable. Remaining land not in individual plots would be farmed cooperatively. However, individual farm households would be given the option to withdraw fully from the land cooperative taking with them their share of land assets. Within two years, those who entered and remain in a voluntary cooperative would vote again whether to retain or dissolve the cooperative. If privatization were to be rapid, cooperative members would withdraw their land plots and farm privately or sell their landholdings. Those who wish to farm jointly could join their land shares to form a new cooperative;
- (7) Those individuals who are members of the nonland cooperative would vote to retain the cooperative, form a joint stock company, or sell the machinery and/or structures. Those choosing to form a cooperative would vote again within two years to retain or dissolve the cooperative. A producers’ cooperative would be prohibited, for antimonopoly reasons, from acquiring a dominant share of the service cooperative;
The new law would give members of each cooperative full ownership rights to a share of farm assets, as well as the right to secede, taking with them assets (real or monetary) equal to the value of their share. The newly established cooperatives would be temporary, and their main function would be to facilitate trade in shares, so that members could exchange their initial endowment for one more suited to their preferences. After the designated trading period, the initial cooperatives would dissolve, as established by their by-laws and the new legislation. At this point all farm assets—land and services—would be individually owned through shares. People who wish to manage their shares jointly by remaining in a cooperative would establish a new production or service cooperative.
Each farm would establish the duration of the trading period and the life of the temporary cooperatives, within a range of one month to one year, with the possibility of extending it for one more year with 75 percent of the votes. If the period chosen is longer than six months, the law would force the cooperative to increase the size of the individual plots now in existence and increase the animal herds in private hands. Where workers prefer a gradual approach to privatization, the process could thus last as long as two years, but the size of private plots and the animal herds under private management would increase steadily in the interim. These private plots and animals could be sold or recontributed to the cooperative for joint management at the discretion of the individual receiving the plot or animals.
Each farm would have the responsibility to determine the number and composition of shares of land and nonland assets. The law would contain procedural guidelines, but the farms would make the final apportionment of shares. Those who have worked most closely with the assets know best which division is likely to be economically viable. The newly formed temporary cooperatives would elect a chairman with primary responsibility for the division of shares, to be distributed by lottery. Trade in shares would begin after the lottery is finished. Those who did not want to farm could trade their land for shares of the services cooperative. People could also trade land for land. All these transactions could involve cash or any other kind of payment.
c. Land and taxation
The taxation of land should be an essential element of private land ownership. Land taxes could be used to buffer the fiscal impact of the loss of debt service arising from the forgiveness of farm debt and of the financing of a rural investment program. Taxes would help ensure that land did not lie idle (for example, being held as a hedge against inflation), and, if progressive, could discourage excessive land concentration. A base tax rate should apply to all land. Above a maximum land size determined for each class of land, the land tax rate could become progressive. The tax should apply both to cooperative holdings and private land plots. However, for the cooperatives the progressivity of the land tax should be based on average plot sizes of the cooperative, that is, the land size divided by the cooperative membership. The land tax rate should be indexed to a wholesale basket of agricultural goods. It should be administered locally and local governments should receive the bulk of the revenues.
d. Existing debt
It has been argued that in order to provide an equitable beginning for all farms, the debt accumulated in the past by the state and collective farms should be forgiven, since this debt is a legacy of past pricing policies and inefficiencies. To pass it on to the new owners might create an unnecessary and unfair burden and possibly the need for the state at a later date to subsidize farms carrying high debt service. These benefits for newly privatized and cooperative farms would, however, need to be weighed against the macroeconomic and financial effects of further debt relief.
6. CREDIT AND INVESTMENT
Attempts to modernize Soviet agriculture, through a disproportionately high allocation of resources, have so far resulted in disappointing growth rates in production and have placed an increasing burden on the state budget. While the share of investment in agriculture has remained consistently high in recent years, production has stagnated or increased only very slowly.
a. Credit and banking
State allocated credit has been widely used to bail out inefficient and high-cost agricultural producers. Under this system, state and collective farms rapidly accumulated debt in the 1970s and 1980s (Table V.5.6). Postponing interest rate payments and credit repayments has become a common practice for a majority of state and collective farms, inevitably resulting in the transfer of short-term credits into long-term credits or the writing-off of a large part of the outstanding farm debt altogether. For example, even in the Ukraine, which enjoys the most favorable natural conditions for farming and has a large proportion of viable profit-making farms, debts have been written off 23 times since 1965.2 Such debt forgiveness is practiced despite very low interest rates for agricultural credit, which are certainly below the current rate of inflation. Prior to the implementation of new banking regulations in November 1990, the following interest rates applied on credits to the agricultural sector: (a) long-term loans (up to 30 years or 10-15 years): 0.75 percent, and (b) short-term loans (one year): collective farms, 1 percent; state farms, 2 percent; and the processing industry, 3 percent. These rates rise to 3-5 percent in the farm sector for rescheduled credits.
|Short term debts||3.0||8.6||57.6||82.3||84.5||87.0||81.6|
Stricter credit conditions and more financial discipline are being introduced. Agroprombank, which is the major credit institution for the agricultural and agro-industrial sector and the largest bank in the country, was converted in September 1990 into a joint stock company, Gosagrobank, with an authorized share capital of rub 8 billion. The Ministry of Finance is the biggest single shareholder, accounting for 32 percent of the initial equity capital. Altogether there are about 4,000 shareholders, mostly state or collective farms and enterprises, local authorities, and a few individuals. The bank plans to build up its own deposit base for reimbursing its sizeable debt to Gosbank. The bank employs 90,000 people and has 3,500 branches (offices) and about 160,000 clients, of which about 50,000 are state and collective farms.
Prior to its conversion, Agroprombank had a portfolio of rub 298 billion. The liability side of the balance sheet consisted of some rub 45 billion of client deposits, including about rub 3 billion of own capital and rub 253 billion of loans from Gosbank. On its conversion to a stock company, rub 73 billion of bad loans were written off. Further write-offs are expected, including some to be decided at the republic level. These write-offs resulted in a simultaneous reduction in the bank’s loan portfolio and in its debts towards Gosbank. The bank’s initial capital of would, under present regulations (which stipulate that total liabilities must not exceed 20 times shareholder funds), provide scope for a loan portfolio of rub 160 billion.
Agroprombank operated on a net interest margin of some 0.25 percent, earning on average an interest rate of 1.75 percent on its loan portfolio and paying, on the liability side, an average rate of 1.5 percent. As of January 1991, it is planned to increase lending rates on short-term credits to 6 percent and on long-term credits to 9-12 percent, and to increase Gosbagrobank’s profit margin enough to make new investments in office equipment, particularly in the field of telecommunications.
This conversion of the agricultural bank to a joint stock company has consequences for the management and role of the new bank. It is doubtful that Gosagrobank currently has sufficient capacity and capability to deal with the credit needs of the agricultural and agro-industrial sector in a market economy. In the past, credits which were given to large state and collective farms and enterprises did not require any detailed evaluation, as defaults on repayment were automatically passed on to the state budget. With the possible emergence of a large number and variety of smaller agricultural cooperatives and private farms, and the need to impose strict financial discipline in the interests of their shareholders and economic efficiency, the bank will need to build up its credit analysis and evaluation capacity considerably to serve a new and very different rural clientele. The bank will not wish to expose itself to excessive risks, in particular as long as land is not privately owned and cannot be used as collateral. Its financial services will need to be complemented with alternative forms of credit facilities, such as credit co-operatives and credit unions which have proved to be very successful in other countries. Technical assistance in setting up these alternative lending and savings institutions may be needed.
Gosagrobank is prepared to continue to act as the state’s intermediary for the implementation of lending programs for specific target groups or sectors, e.g., to individuals or cooperatives taking over land and assets from insolvent state or collective farms, or to farms which could survive in the new conditions. Credits for these purposes would have to be based on a careful evaluation of the capacity to restructure into profitable units and may require a subsidy during the transition to cover the bank’s transaction costs of dealing with many more smaller clients requiring technical evaluation. A permanent direct credit subsidy for these clients, however, must be avoided. A major concern will be the ability of the newly commercialized bank to respond adequately to the enormous demands for credit that will be placed upon it to meet the private investment needs of the rural areas. No longer purely an outlet for government investment, this bank (and the other banks) will now be aiming at a more commercial approach to lending which will, at least in the short term, reduce their capacity to deliver credit. This could lead to a major contraction of investment at a time that investment should be maintained if sector growth is to be kept up. This situation has to be monitored carefully by the authorities so that remedial and transitional arrangements can be put into place if production is seriously affected.
b. Public investment
Investment in agricultural production, processing and infrastructure has currently (1986-89) been running at just under rub 50 billion per annum, which is some 23 percent of total annual investment in the USSR (Table V.5.7). The main issues are (i) the efficiency of the allocation of these resources; (ii) the amount of the allocation to different subsectors; (iii) the sources of funds for investment and (iv) the needed institutional arrangements for guiding, monitoring and evaluating investment policy.
|Investment in Agricultural Production||Investment in Rural Housing and Rural Infrastructure||Agricultural|
in the Economy
in the Economy
|By state budget||By collective farms||Total||Share in|
|(billion rubles)||(billion rubles)|
Annual averages prior to 1986.
During 1986-89, some 55 percent of total agricultural investment was by farms, 22 percent was directed to rural infrastructure, 13 percent into large-scale irrigation and drainage systems, and 11 percent in agro-industry and storage (Table V.5.8). Investment by farms includes investment in tractors, harvesters and ancillary agricultural equipment, as well as equipment for livestock and localized irrigation such as central pivot and on-farm pumped projects. Rural infrastructure covers access roads to and within farms, social infrastructure such as housing, water and gas systems, and in some cases medical clinics and schools. Large-scale irrigation and drainage covers investment in large projects, which are mainly supported by the all-union budget, particularly in Central Asia and the Volga River region in the case of irrigation, and the more extreme northwestern part of the country in the case of drainage. Agro-industry and storage represents the diverse subsectors of the food processing industry including cereals, feed and sugar processing, as well as fruit and vegetables and alcoholic beverages.
|Investment in agricultural production||28.6||31.2||35.0|
|Agro-industry and storage||5.3||5.2||6.8|
The proportion of investment in farm equipment and machinery has remained fairly steady over the last 15 years, typically absorbing some 60 percent of all investment. On the other hand there has been a significant increase in the share of investment in rural infrastructure. Investment in agro-industry and storage has, however, remained steady at a relatively low rate of 10 percent of the investment program throughout the same period (Tables V.5.8 and V.5.9); and that in irrigation and drainage reached a peak in the late 1980s before falling back sharply in the last two years (Table V.5.10).
|Meat and dairy||0.8||0.8||1.2|
Although there has been an overall increase in the rate of investment in rural infrastructure in the last 15 years, inadequate rural infrastructure is consistently cited as a factor preventing normal farming operations and contributing to the poor quality of life in the rural areas. Access to farms during the critical harvesting period is often difficult particularly in the more northern areas where the growing season is short. In many years, and 1990 was the most recent example, many crops remain unharvested because of the problem of access and transportation. Telecommunications and other facilities essential for the introduction of a more liberal marketing regime remain very underdeveloped except in the major urban centers.
Inadequate attention has been paid to the economic and environmental aspects of many large-scale irrigation and drainage projects with the result that funds have been wasted on “grandiose schemes,” while costly and irreparable damage has been caused to the environment. Although the achievements in the irrigation program have been impressive, with a doubling of the area under irrigation to some 22 million hectares since 1966, the development of farming on newly equipped irrigation and drainage schemes has lagged, so that the sought after benefits from this investment have not yet been fully generated. The underutilization is reportedly worse in the drainage projects of the Northwest than in the irrigated areas of the South, but the problem is a general one. Another concern is the shortage of quality materials and spare parts to support the construction program in irrigation because of inadequate allocation by the central planning authorities. This has led to the use of substandard materials in some cases (such as poorer quality polyethylene for drainage pipes with inadequate filter materials, leading to early clogging). The result has been severe maintenance problems and underperformance in some completed works.
In the irrigation subsector, needed reforms in investment have already started. At the beginning of the 1980s large irrigation and drainage schemes accounted for some 15 percent of all investment in the sector and reached a peak in 1987 of rub 9.4 billion. This ratio has since fallen to 12 percent as a new emphasis on more economic investments has been introduced and major potential “white elephants” shelved. The need to make more progress on improving output from completed investments however remains urgent.
A general problem facing the authorities in evaluating projects is the extremely distorted prices established by government controls. Priorities and returns to investment lose meaning in such an environment, especially given that world market prices provide poor guidance when the official or even market exchange rate is meaningless and distortions are so widespread that even estimates of a shadow exchange rate are impossible.
In addition, the capacity of the government to finance the investment program in agriculture has suffered from increasing pressures to cut expenditures and reduce budget deficits. The recent tendency has been for the central union budget to diminish while more spending authority is being passed on to the republics. Part of the problem has been the inability of the government to use the banking system to mobilize funds for investment through loans that are reimbursed by borrowers. Debt forgiveness has become so commonplace that the banks lending to agriculture have emerged as cash transfer agents for government funds rather than real banks. This has eliminated discipline from the financial markets and hence the ability of the banks to participate in investment.
Finally, a major problem has been the weakness of the institutions responsible for ensuring that investment funds are used in a way which meets the government’ s criteria for acceptable investment. This is shown by the costly Kara-Kum canal project and similar projects in the industrial sector, and by the past inability of the Agroprombank to carry out the rigorous financial analysis necessary to test the viability of projects which it supports.
The restructuring of the banking sector, combined with the gradual privatization of the land and the creation of autonomous farms, should enable the banking sector to provide a major new source of funds for agriculture which would gradually take the pressure off the state and republican budgets. Current plans are to place a limit on union spending for agricultural investment, with the balance to be taken up by the republican budgets and the banks. This seems to be a realistic objective. However, on the institutional side, there is at the same time a vital need to introduce and apply strict investment criteria for union and republican investments to bring about the needed upgrading in investment efficiency.
The improvement of investment efficiency would be greatly facilitated by the proposed move to a market economy because the real value of investments could then be more readily determined. However, this improvement will not be achieved unless the institutions responsible for guiding and authorizing investments play a much more active role in vetting investments to ensure they meet minimum economic and financial criteria. Criteria for the acceptability of investments at union and republic levels and by the banks need to be established and a process of independent review of investments put in place. Also training courses need to be introduced for key staff with the objective of upgrading project and investment analysis in the key public and banking institutions.
A shift of investment from the farm to downstream storage and processing is required since the current wastage of agricultural products suggests that major returns can be gained from reducing losses. However, funds for these investments will be strongly offset by the need for investment funds by newly privatized farms, which will have to purchase machinery more adapted to operating on smaller farms. The rate of this new on-farm investment will depend on the speed of the privatization of farming and the extent to which foreign exchange can be made available to finance the required imports for investment. Indeed, the rate of restructuring that can be achieved in the sector may, in the short term, be limited by the rate at which imported equipment can be made available since Soviet industry seems ill-equipped at present to deliver substantial quantities of the type of farm and agro-industrial equipment that will be needed. Relaxation of import controls and more liberal policies regarding the establishment of foreign machinery suppliers and the import of the spare parts required to maintain this equipment will become just as important as making the necessary funds available. Privatizing industries that produce farm machinery will also assist in accelerating the production of new models more suitable for private agriculture.
Expansion of rural infrastructure will need to be a priority in public investment. This will require a new analysis of objectives and priorities in the restructuring of rural areas. New district-level plans need to be prepared to capture the most urgent requirements in the coming years, but given the backwardness of many rural areas, the process of investment could well be lengthy and costly. A continuous commitment to improvement must be maintained for many years for such a policy to bear fruit. However, an immediate need that will have to be reviewed is the building of rural markets so that local trade can take place. In the irrigation subsector, the current policy of concentrating on the achievement of better production and benefits from existing projects appears to be correct and it should be maintained. It would now be timely to carry out a full technical and economic assessment of all major existing schemes to determine the measures required to optimize these benefits under the new economic conditions. This could, for example, lead to changes in land use in these areas and some focused investments to provide for better productivity (drainage and canal rehabilitation, for example). Direct investments by farms or farmers in local irrigation schemes should still be encouraged where they are shown to be economically and financially viable.
7. TECHNICAL ASSISTANCE
The need for technical assistance in the transition to a market economy will be substantial, particularly in banking and credit, project and economic analysis, trade systems and policy, food and nutrition monitoring, and management and marketing of agro-industry. Technical assistance in establishing new criteria for evaluating investment is of high priority. In addition, standard information systems such as statistical collection of market activity, crop reporting and trade flows are necessary and will require specific technical assistance. Standards for hygienic products and disease control will need to be reevaluated and coordinated with world standards. Agricultural chemical standards and practices should also be reviewed and respecified as necessary. Steps should also be taken to assist in establishing more sophisticated markets such as in options and eventually futures contracts. The research and extension network will also have to be revamped to take into account the changing structure of farming and the more independent inclinations of some of the republics. It is also important that teams of advisors be formed and supplied on a regional basis along with advisors at the all-union level. A longer-term program of training and fellowships should also be instituted in order to establish a base for the management of the agro-industrial sector in the future. Finally, legal assistance will be necessary to provide the regulatory and institutional framework for the reforms.
8. IMMEDIATE MEASURES AND ASSISTANCE
Price liberalization at all levels is of paramount importance. The most immediate pressing need is to get supplies to the cities and to give a clear signal to producers and processors that the government has ceased its policy of preempting supplies through state orders and that prices are largely free. If food subsidies are not reduced, it is likely that inflationary pressures will intensify and the difference between state retail and free market prices will increase. With these large differences, farms will be reluctant to continue to supply output through state orders. To maintain this system, a program of compulsory supplies would be necessary and farming incentives would be severely harmed, with sustained repercussions. Instead, if prices are liberalized, supplies would be forthcoming and pressure would be reduced in the secondary markets. Furthermore, the budget deficit could be reduced and monetary expansion checked. Simultaneous with the price liberalization should be the implementation of various safety net programs. An inter-republic council should also be established immediately to assist in monitoring the food situation and coordinating possible food assistance. Furthermore, a private retail sector, including rental space for local retail marketing, should be encouraged, with the creation of local markets and stores. Supplemental imports should accompany the initial liberalization so supplies are found immediately in the stores and markets. The international community might facilitate comprehensive price liberalization in the context of a comprehensive adjustment program by providing concessionary sales or donations of processed foods for targeted programs.
An immediate priority is to begin the process of demonopolization of foreign trade in agricultural products and the eventual establishment of uniform tariffs for these commodities and their inputs. An immediate benefit of this liberalization would be the import of protein feed to supplement widely acknowledged deficiencies in animal feed rations and the saving of millions of tons of grain. The liberalization of trade would reduce uneconomic transshipment of commodities across the country and relieve pressure on the internal transport system. It would also assist in alleviating local shortages of commodities, especially in republics close to the borders of other countries. The convertibility of the ruble and the availability of foreign exchange are, of course, fundamental to a more liberal agricultural trading regime.
Additional measures would be the early announcement of the land reform program, including a schedule for its implementation and the passage of the necessary legislation to establish the right to private ownership of land. The international community and the Soviet people have much to gain from a successful transition to a market-oriented agricultural economy in the USSR. Several kinds of international assistance could contribute substantially to the effort, reducing both the time in transition and the disruption associated with it. The sequencing of assistance will be an important determinant of its productivity. The international community could provide commodity assistance (donations or concessional sales), but except where a clear humanitarian need can be identified, commodity aid should only be related to the liberalization of retail prices as part of a comprehensive reform program. The assistance could go to organized public feeding and commodity programs and to targeted areas with unusually high free-market prices or severe nutritional problems. The objective would be to facilitate full retail price liberalization for food, and thus relieve a constraint on further policy reform.
Technical assistance in evaluating agricultural financial institutions and investment criteria, monitoring food supply, and setting the legal framework for land reform and privatization of farm assets would also be useful in the early period. Also, early assistance should be directed at reviewing and establishing agro-chemical standards.
After the legal structure for private enterprise is in place and liberalization of prices (retail, wholesale, and producer) is well underway, investment in rural infrastructure and agricultural processing will be highly productive. Projects to rebuild rural infrastructure and modernize processing should follow, and not precede, price reform, land reform, and privatization of agricultural assets. The opportunity cost of investment funds, both domestic and foreign, during the transition is extraordinarily high. Projects should be undertaken only after rigorous analysis indicates that they will be productive in the new economic environment, and will contribute to further the transition process.