Farm sector restructuring in Belarus: Progress and constraints

Public Disclosure Authorized BANK Public Disclosure Authorized TECHNICAL PAPER NO. 476 'am.,' andSociallySustainable EuropeandCentralAsiaEnvironmentally """'i DevelopmentSeries WTP475 WorkIn pregr August2000 for publiodfteualors Farm Sector Restructuring in Belarus Progressand Constraints Public Disclosure Authorized Public Disclosure Authorized WORLD Csaba Csaki Zvi Lerman Sergey Sotnikov Recent World Bank Technical Papers No. 408 Stephenson, Donnay, Frolova, Melnick, and Worzala, Improving Women's Health Services in the Russian, Federation: Results of a Pilot Project Onorato, Fox, and Strongman, World Bank Group Assistancefor Minerals Sector Development and Reform in Member Countries Milazzo, Subsidies in World Fisheries: A Reexamination Wiens and Guadagni, Designing Rulesfor Demand-Driven Rural Investment Funds: The Latin American Experience Donovan and Frank, Soil Fertility Management in Sub-Saharan Africa No. 409 Heggie and Vickers, Commercial Management and Financing of Roads No. 410 Sayeg, Successful Conversion to Unleaded Gasoline in Thailand Calvo, Options for Managing and Financing Rural Transport Infrastructure No. 404 No. 405 No. 406 No. 407 No. 411 No. 413 No. 414 No. 415 No. 416 No. 417 No. 418 Langford, Forster, and Malcolm, Toward a Financially Sustainable Irrigation System: Lessonsfrom the State of Victoria, Australia, 1984-1994 Salman and Boisson de Chazoumes, International Watercourses: Enhancing Cooperation and Managing Conflict, Proceedingsof a World Bank Seminar Feitelson and Haddad, Identification of Joint Management Structuresfor Shared Aquifers: A Cooperative Palestinian-Israeli Effort Miller and Reidinger, eds., Comprehensive River Basin Development: The Tennessee Valley Authority Rutkowski, Welfare and the Labor Market in Poland: Social Policy during Economic Transition Okidegbe and Associates, Agriculture Sector Programs: Sourcebook Francis and others, Hard Lessons: Primary Schools, Community, and Social Capital in Nigeria No. 421 Gert Jan Bom, Robert Foster, Ebel Dijkstra, and Marja Tummers, Evaporative Air-Conditioning: Applications for Environmentally Friendly Cooling No. 422 Peter Quaak, Harrie Knoef, and Huber Stassen, Energyfrom Biomass: A Review of Combustion and Gasification Technologies No. 423 Energy Sector Unit, Europe and Central Asia Region, World Bank, Non-Payment in the Electricity Sector-in Eastern Europe and the Former Soviet Union No. 420 No. 424 Jaffee, ed., Southern African Agribusiness: Gaining through Regional Collaboration No. 425 Mohan, ed., Bibliography of Publications: Africa Region, 1993-98 No. 426 Rushbrook and Pugh, Solid Waste Landfills in Middle- and Lower-Income Countries: A Technical Guide to Planning, Design, and Operation No. 427 Marifio and Kemper, Institutional Frameworks in Successful Water Markets: Brazil, Spain, and Colorado,USA C. 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ISBN:0-8213-4792-6 ISSN:0253-7494 Cover photo: "Animal Production Farm" by Mr. Viktor Drachev, photographer from the "Sovetskaya Belorussia" newspaper. Csaba Csaki is lead agricultural adviser in the Environmentally and Socially Sustainable Development unit of the World Bank's Europe and Central Asia Region. Zvi Lerman is a professor at the Hebrew University of Jerusalem and a consultant to the World Bank's Development Economics Research Group. Sergey Sotnikov is a research associate at the Department of Economics, Iowa State University and a consultant to the World Bank's Environmentally and Socially Sustainable Development unit. Libraryof Congress Cataloging-in-Publication Data has been applied for. Csaki, Csaba Farm sector restructuring in Belarus : progress and constraints / Csaba Csaki, Zvi Lerman, Sergey Sotnikov. p. cm. - (World Bank technical paper; no. 475. Europe and Central Asia environmentally and socially sustainable development series) Includes bibliographical references. ISBN0-8213-4792-6 1. Land reform-Belarus. 2. Agriculture-Economic aspects-Belarus. 3. Farms-Belarus. I. Lerman, Zvi, 1941- II. Sotnikov, Sergey. III. Title. IV.World Bank technical paper; no. 475. V.World Bank technical paper. Europe and Central Asia environmentally and socially sustainable rural development series. HD1333.B38C77 2000 338.1'09478-dc2l 00-043359 Contents Foreword.................................................................. v Abstract................................................................. vi Preface ................................................................. vii Summary and Conclusions................................................................. ix Chapter One: Sectoral Performance and the Policy Environment for Farm Restructuring ........... 1 1.1 Stagnating Agricultural Performance .............................. .................................... 1 1.2 Pervasive Government Control and Persisting Distortions in the Macroeconomic Environment................................................................. 7 1.3 Current Proposals for Improved Agricultural Support Policy............................................ 13 Chapter Two: Legal Framework for Land Reform and Farm Restructuring .............. ................... 15 2.1 Status of Land Reform ................................................................. 15 2.2 Limited Progress in Farm Restructuring................................................................. 19 2.3 Emergence of Private Farms................................................................. 23 Chapter Three: Outcomes of Farm Sector Reorganization: Evidence from the Field .. 27 3.1 Sample Design ................................................................. 27 3.2 Reorganization of Large Farm Enterprises................................................................. 30 3.3 Land in Rural Households: Ownership, Transactions, and Security of Tenure ......... ........42 3.4 Creation of a Private Farming Sector .............................. ................................... 46 Chapter Four: Production and Productivity: Collective and Individual Sector Compared ........... 53 53 4.1 Primary Agriculture ................................................................. 4.2 Partial Productivity Indicators ................................................................. 57 60 4.3 Productive Efficiency ................................................................. Chapter Five: Financial Performance of Farms ............................................... 5.1 Indebtedness and Liquidity................................................................. 5.2 Financial Growth................................................................. 5.3 Farm Financing and Credit System .......................... ....................................... 65 65 70 72 Chapter Six: Market Support Services: Products Sales and Input Supply Systems ........... ........... 79 6.1 Product Marketing Systems ................................................................. 79 6.2 Input Supply System................................................................. 85 iii Chapter Seven: Social Infrastructure and Standard of Living........................................................ 89 7.1 Rural Social Services.................................................................. 89 7.2 Rural Family Incomes and Standard of Living .................................................................. 96 Chapter Eight: Effective Restructuring of the Farming Sector: Conditions and Principles .......... 103 8.1 What Can Belarus Learn from the Regional Experience? ......................... .........................103 8.2 What Can Belarus Do for Effective Restructuring? ..................................................... 11...... I Selected References on Land Reform and Farm Restructuring ...................... .......................... 117 iv Foreword Agriculture remains the main source of employment and livelihood for the large rural population of many transition countries, especially among the former Soviet republics. Accordingly, the World Bank continuously monitors the progress of land reform and farm restructuring in the region because of the potential impact of these processes on rural development and poverty alleviation in rural areas. The present study on Belarus is the latest addition to a long and growing series of World Bank publications on land reform and farm restructuring in the former socialist countries of Europe and Central Asia. The unique features of all these publications is their reliance on firsthand empirical information collected through extensive farm surveys of various rural constituencies. Farm surveys have been conducted by the World Bank in many countries of the CIS (Russia, Ukraine, Moldova, Armenia, Georgia, Turkmenistan, Kazakhstan), and Central and Eastern Europe (Poland, Romania, Bulgaria, Hungary, Albania). Analysis of survey findings enables the World Bank to base its policy dialogue with governments in the region on solid empirical facts, making the Bank's recommendation much more credible and relevant. The new findings for Belarus will similarly provide a platform for useful policy discussions with this country's government and supply the many international donors active on the local scene with essential information for the design of their strategic programs. Kevin Cleaver Director Environmentally and Socially Sustainable Rural Development Europe and Central Asia Region v Abstract A farm-level survey was carried out in Belarus in the second half of 1999, providing a detailed examination of changes in the three main components of the farming sector - large farm enterprises, households of farm employees, and independent private farms. This report presents a description and analysis of the survey findings, supplemented by a general discussion of relevant policy and legal issues, and recommendations for future reforms for the Belarussian agricultural sector. Less than 100 of 2,500 farm enterprises in Belarus are classified as reorganized farms, having changed their legal status during the 1990's and. There have been practically no changes in the size of land holdings and the labor force as a result of reorganization. The reorganized farms have not undergone significant internal restructuring and generally continue to operate like traditional collectives. These reorganized farns were larger and more profitable than the rest before entering the process of reorganization, and they remain larger and more profitable to this very day. However, the very novelty of reorganization and the special attitude of managers in reorganized farms have led to improvements in workers' behavior, which may be a sign for positive quantitative changes in future performance. For the majority of the rural population, the household plot remains an important source of family income, both in the form of farm products for own consumption and as supplementary cash revenue from farrn product sales. Independent family farms are still a marginal phenomenon in Belarus, but the private farmers are generally well-off and optimistic. Although comparisons of productivity and efficiency between small private farms and large collectives produce somewhat ambiguous results, the survey findings clearly refute the traditional view of many policy makers in Belarus that large-scale farms are more efficient than small-scale farms. vi Preface The present study is based on the results of a survey conducted in Belarus by the World Bank in cooperation with the Belarusian Ministry of Agriculture and Food and the Institute of Agricultural Economics in Minsk. The survey was designed to evaluate the progress in farm restructuring and its impact on major performance indicators of the farm sector in Belarus. The main purpose of the report is to provide a rigorous analytical basis for the design of country assistance strategy and for an on-going dialogue with the government. In a country like Belarus, where reforms are implemented reluctantly and the World Bank's financial support remains limited, analytical studies such as this constitute the most important tool to engage the government in a constructive dialogue. The study cannot be expected to produce an immediate significant impact on the ground, but it will open a discussion of the relevant facts among all stakeholders and will enhance overall understanding of the reform process and the economic situation in the agricultural sector in Belarus. In this way, the study will stimulate the first necessary steps toward more meaningful reforms. The study was conducted during May-October 1999 and included a questionnaire-based survey covering a sample of managers and employees of large farm enterprises, independent private farmers, and agricultural policymakers. The study was managed by Csaba Csaki for the World Bank. The questionnaires were developed by Zvi Lerman and Sergey Sotnikov, based on instruments used in previous World Bank surveys. The field work, data entry, and database development were carried out by the Belarusian Institute of Agricultural Economics under the direction of Aleksander Shpak with supervision by Sergey Sotnikov. Anja Crommelynck and Pepijn Schreinemachers provided research assistance for the analysis of the survey data in Washington. The cooperation and assistance of the Belarusian Ministry of Agriculture and Food and the World Bank Resident Mission in Minsk are gratefully acknowledged. Ed Cook and Gershon Feder acted as peer reviewers of this report. Laura Tuck provided extensive comments on an earlier draft. A Russian-language version of the study was prepared for dissemination in Belarus and other parts of the former Soviet Union. A special seminar was organized in Minsk on June 1-2, 2000, in which the findings of the study were discussed in frank detail by Belarusian decision makers, participants from other CIS countries, and representatives of the World Bank. All figures and tables in this publication are based on the authors' field work and the 1999 World Bank farm survey in Belarus, unless a different source is indicated. Dashes (--) and the abbreviation "NA" in tables indicate that corresponding data were not available in the survey. vii Summary and Conclusions The process of land reform and farm restructuring in Belarus began as early as 1990when the country was still part of the Soviet Union and Gorbachev's policies in Moscow 1991, encouraged movement and change in all Soviet republics. The World Bank has been closely monitoring the progress of land reform in Belarus since 1992. A comprehensive agricultural sector review' was developed in 1994 and a Belarus component of a multi-country trade study2 was prepared in 1995. An overview of general economic reforms in Belarus, without special emphasis on agriculture, was published in 1997.3 Although several agricultural missions have visited the country, no major analytical work on land reform and farm restructuring has been undertaken in recent years. The Government of Belarus, as part of its efforts to enhance the understanding, the design, and the implementation of the agricultural reform process, invited the World Bank to cooperate in an empirical study of market-oriented changes in the fanning sector. This joint study, launched in 1998-1999, was intended to review the progress of agricultural reforms and identify the constraints to change toward greater productivity and efficiency. This latest study of the Belarusian farming sector was conducted in two phases. First, an agricultural policy update was prepared and published as a self-standing document.4 Then a farm-level survey was designed and implemented, providing a,detailed examination of changes in the three main components of the farming sector - large farm enterprises, households of farm employees, and independent private farms. The present report provides a description and analysis of the survey findings (Chapters 3-7), preceded by a general discussion of relevant policy and legal issues (Chapters 1-2). The report concludes with a review of reform experiences in other countries in the region, and suggests specific lessons that Belarus can learn from the regional experience (Chapter 8). This section summarizes the main findings and conclusions of the study. A Survey of the Three Main Components of the Farm Sector The survey conducted in September-October 1999 was designed to evaluate the outcomes of the farm restructuring process that has been moving at a slow, but fairly steady, rate since the early 1990's. The objectives of the survey included examination of a variety of reform-related topics with relevance for agriculture - land use, internal restructuring of farm enterprises, changes in production patterns, development of market services for farms, growth of the 1Belarus: Agriculture and Food Sector Review, Natural Resources Management Division, Country Department IV, Europe and Central Asia Region, Report No. 12576-BY,The World Bank, Washington, DC (November 1994). 2Agricultural Trade and Trade Policy: A Multi-country Analysis 1991-1994 - Belarus, Natural Resources Management Division, Country Department IV, East Europe and Central Asia Region, Technical Report No. 15962, The World Bank, Washington, DC (October 1995). 3 Belarus: Prices, Markets, and Enterprise Reform, World Bank Country Study, The World Bank, Washington, DC (July 1997). 4 Belarus: Agricultural Policy Update 1998-1999, ECSSD Environmentally and Socially Sustainable Development Working Paper No. 15, Washington, DC (June 1999). ix x Summary and Conclusions: individual farming sector (including households in farm enterprises and independent private farms), financial performance of farms, impact of reforms on life in rural households. In discussions with representatives of the international community, government officials and policy makers in Belarus always emphasize the existence of a small group of farm enterprises to which they refer as "reorganized." These are farm enterprises that changed their legal status in the 1990's, transforming from a collective farm (kolkhoz) to a new corporate form, such as a joint-stock company or a partnership. One of the aims of the present study was to identify the changes in internal organization and performance that have taken place in these reorganized farms compared to all the rest. However, unlike recent World Bank studies in Ukraine and Kazakhstan that focused specifically on reorganization of large farm enterprises, the present study took a much broader view of the process of reorganization. It examined the three main components of the farm sector in Belarus: large farm enterprises, households of farm employees, and independent private farms. Performance comparisons were made for the major commercially oriented units, which included reorganized and non-reorganized farrn enterprises, as well as individual farms. The impacts of reorganization on rural households and the changing role of household production were also assessed. Reorganization of Large-Scale Farm Enterprises Produces Limited Effects Reorganized farms perform better, but mainly because they were better run initially. Several of the key questions addressed in this study focused on the impact of reorganization in the farm sector. Do reorganized farm enterprises perform better than non-reorganized ones? The simple answer to this question is that reorganized farms appear to perform better, but much of the reason for their better performance may be embedded in the initial conditions. The survey shows that reorganized farms have higher profits, higher profit margins, and higher efficiency scores. However, the data available also indicate that most of these positive features characterized the reorganized farms before they chose to reorganize and, in fact, may have actually driven the reorganization process in the first place. The existing data seem to indicate that it was the best farms in Belarus, guided by experienced and reform-oriented managers, that opted to reorganize when the opportunity presented itself. Various motives may have shaped the managers' decision to reorganize, but it is clear that the change of legal status associated with reorganization allowed distribution of property shares to members, including managers. It can be expected that the more profitable the farm was, the more interested the manager would be in pursuing the option to reorganize and secure a stake in future profits. As a result, there was a high degree of self-selection in the process of reorganization: the best farms chose to reorganize, and as a result today the reorganized farms are the best in Belarus. Nevertheless, the novelty of reorganization and the special qualities of the managers in reorganized farms created a certain dynamic that gradually induced beneficial changes in workers' behavior, a departure from the traditional command-economy outlook on farm operation, and a more positive, forward-looking view of the relations between the farm and the new economic environment. These changes are still not quantifiable, but they will probably lead to positive quantitative changes in future performance. Already today there are signs of divergent growth between reorganized and non-reorganized farms: output, sales, and technical efficiency of reorganized farms increased slightly between 1995 and 1998, while those of non-reorganized Farm Sector Restructuring in Belarus xi farms decreased; profits and profit margins in reorganized farms declined less than those in nonreorganized farms during this period; and debt increased less for reorganized than nonreorganized farms. Farm size and management structure remain unchanged. Only 92 out of more than 2,500 farm enterprises have so far changed their legal status from the traditional collective or state farm to some new legal organizational form. Yet even this limited reorganization effort has not been accompanied by significant internal restructuring. There has been no breakup of farm enterprises into smaller, more manageable units, and the reorganized farms generally continue to operate like their collective successors, with limited response to market signals and total subordination to government controls. Farm enterprises so far have failed to make significant adjustments in labor force and in the size of land holdings. All farms - both reorganized and non-reorganized continue to employ roughly the same number of workers per hectare of land as before the reforms. There is no evidence of genuine internal restructuring of former collectives, regardless of their classification as reorganized or non-reorganized. The only new attribute of reorganized farm enterprises appears to be the distribution of collective property to members in the form of property shares - paper certificates of entitlement to fractional ownership. Government policy prohibits allocation of land to collective members, and the concept of land shares, so common in other countries of the former Soviet Union, is unrecognized in Belarus. Limited improvements in profitability and efficiency. Table A presents a comparison of profitability and efficiency of reorganized and non-reorganized farms in the survey for 1995 and 1998. Profitability is measured by the profit margin of sales, i.e., the ratio of profit to sales. Efficiency is measured by the relationship among all inputs employed and all outputs produced; it is expressed by so-called technical efficiency scores, which measure the distance of farms from the efficient production frontier in the input-output space. Reorganized farms as a group achieved higher levels of profitability than non-reorganized farms both in 1995 and 1998. Technical efficiency scores were also higher for reorganized farms than for non-reorganized farms in both years. Survey findings suggest that the higher profitability and technical efficiency of reorganized farms may be attributable to their greater emphasis on high value added nonagricultural activities in both 1995 and 1998. Table A. Profitability and Efficiency of Farm Enterprises by Reorganization Category: 1995 and 1998 Reorganized farms Profit margin on sales (percent of sales)* Technical efficiency (maximum value 1) 1995 1998 1995 1998 21 16 0.80 0.83 7 0.76 0.74 Non-reorganized farms 13 *Weighted average for the two groups of farms. Since reorganized farms showed these differences already back in 1995, their better performance in 1998 is not necessarily the result of reorganization: to a certain extent, it may be an outcome of different starting conditions for the two groups of farms. Yet the gap in technical efficiency scores of reorganized and non-reorganized farms increased between 1995 and 1998: xii Summary and Conclusions: the difference in technical efficiency was not statistically significant in 1995, and it became statistically significant in 1998. This may provide a tentative indication of dynamic performance improvement in reorganized farms relative to the non-reorganized sample - a phenomenon that has not been observed using other quantitative indicators. All farm enterprises have low technical efficiency: 0.7-0.8 out of the maximum achievable value of 1 for farms that lie on the efficient production frontier. Thus, most farm enterprises, whether reorganized or non-reorganized, lie far from the potentially attainable efficiency frontier, and there is a large potential for increasing agricultural output through measures designed to improve the efficiency of farm enterprises. Productivity and efficiency improvements can be achieved only by changing the internal structure of farm enterprises in conformance with market principles and by relaxing pervasive government controls. Modest impact on yields. Crop yields show a mixed picture across farms of different categories, including reorganized and non-reorganized farm enterprises and family farms (Table B). The differences in crop yields among farms of different types are not statistically significant, and, overall, we cannot decide at this stage if the productivity of land, as measured by physical crop yields, is higher in reorganized farm enterprises than in non-reorganized ones, or if it is higher in individual farms than in farm enterprises:. The same applies to milk yields, which are statistically indistinguishable for farms of different organizational forms. TableB. Mean Yields in Farms of Different Categories Grain, ton/ha Reorganized farm enterprises 2.7 Non-reorganized farm enterprises 2.4 Independent family farms 2.5 Sugar beet, ton/ha 33.3 34.7 40.6 Potatoes, ton/ha 14.7 13.1 14.5 Milk, ton/cow/year Weight gain, cattle, kg/day 3.1 0.426 2.8 0.380 3.5 0.620 Weight gain, pigs, kg/day 0.360 0.260 0.450 A clearer effect is observed in the productivity of livestock as measured by daily weight gains of animals (Table B). These are much higher for individual farms than for farm enterprises. The differences in animal weight gains are also statistically significant between reorganized and non-reorganized farm enterprises, but a more detailed analysis shows that the higher weight gains in reorganized farms are explained by their substantially larger size, which is a feature of the initial conditions, and is not a result of reorganization. Among farm enterprises, there is a clear dependence of livestock productivity on the size of the animal herd, probably due to effects of specialization in the livestock sector. Given this observation for farm enterprises, the higher livestock yields of the small individual farms are a particularly remarkable achievement. It is probably attributable to the benefits of family-based organization that outweigh the benefits of specialization in collectives. Improved workers' behavior and business outlook. While reorganization does not appear to have improved measurably the economic and financial performance of agriculture, significant differences are observed between reorganized and non-reorganized farm enterprises in some xiii Farm Sector Restructuring in Belarus Thus, dimensions. behavioral labor relations and workers' behavior are clearly better in the reorganized farms. Managers of reorganized farm enterprises give a much more positive assessment of the behavioral patterns of their workers than managers of non- Fig. A. Negative Evaluation of Workers' Behavior (percentof managersassessing deteriorationbyeach behavioralvariable) percentofmanagers 60 I_I 40 reorganized farmns. Deterioration of basic behavioral variables of 30 r Reorganized IO Non-reorganized] farm workers during the last few years is reported much more frequently by managers of non- reorganized farms than managers of reorganized (Figure A). by farms 20 10 1 0 Satisfaction Motivation Discipline Managers of reorganized farm enterprises believe in what they are doing; nearly 50% are convinced that the situation of their farms will improve as a result of reorganization. Managers of non-reorganized farms are much more pessimistic on this point, and most expect their situations to deteriorate, or at best, remain unchanged. Managers of reorganized farms are older, more experienced, and more reform-minded than managers of non-reorganized farms. With such managers at the starting point, it was easier for these farms to take to the uncharted path to reorganization. The novelty of the process of reorganization and the special qualities of the managers in reorganized farms have created a certain dynamic that gradually induces beneficial changes in workers' behavior, a departure from the traditional command-economy outlook on farm operation, and a more positive, forwardlooking view of the relations between the farm and the new economic environment. These changes are the only finding that points to a tangible improvement in reorganized farms, and they may lead to possible performance Fig. B. Structure of Family Income improvements in the future. Household Plots Remain the Basis for Individual Agricultural Activity Salary 51% Household plots are the backbone of individual agriculture in Belarus, producing almost 40% of gross agricultural the country's product on 16% of land. Yet even from suffers sector this interventionist government policies, and its output declined by 20% between 1996-1998. The decline of output from the individual sector in t rtssalesn 6% 2% Plotconsumption 41% xiv Summary and Conclusions: Belarus is a unique phenomenon among all countries of the former Soviet Union, where the individual sector continues its steady growth against the backdrop of general decline in collective agriculture. Allocation of land to household plots has been the one most tangible feature of the process of land reform, with the average size of a family plot increasing by 50% from 0.4 hectare in 1990 to 0.6 hectare in 1999. Household plots continue to maintain their critically important role for rural families. Household plot production accounts for over 40% of rural family income (Figure B) (net cash income from product sales plus value of own production consumed), and approaches the share of salaries (in cash and in kind) in family income. Household farming appears to be developing beyond the traditional subsistence mode: 75% of households in the 1998 survey report sales of farm products from household plots, and these households sell (on average) one-fifth of their output. For some products, such as milk, meat, eggs, vegetables, and fruits, households sell as much as 40%-50% of their total production. The cash revenue from these sales is more than sufficient to cover all the cash production costs, which supply the household with food and generate the surplus for commercial sales. Independent Family Farming Plays a Marginal Role, But Private Farmers Report Positive Outcomes Slow development of private farming. Of the two components of individual farming household plots and independent family farms - the latter remain a marginal factor in Belarus. Private farmers control a total of 67,000 hectares, or a mere 0.6% of agricultural land. Their contribution to agricultural output is commensurate with their share in land. There is a total of 2,600 independent private farms in Belarus, compared with more than 2,300 farm enterprises - a ratio of about 1:1. In Russia the ratio is about 10:1 (270,000 private farms compared with 27,000 farm enterprises), and even Ukraine, with its generally sluggish reform, has 30,000 private farms to 12,000 farm enterprises, i.e., a ratio of 2.5:1. The rate of creation of private farms in Belarus is thus far behind its two large neighbors. The number of private farms actually has been declining since 1995 due to liquidations and slow creation of new entities. While both private farms and farm enterprises operate in the same restrictive economic environment, private farms do not enjoy most of the subsidies that farm enterprises receive from the government. Slow development of private farming may be attributed to the restrictive economic environment and to the government's failure to ensure equal operating conditions for collective farm enterprises and individual farms. Instead of ensuring supportive conditions for the development of the private farming sector, the government is trying to impose administrative controls over private farmers, similar to its traditional controls over farm enterprises. As of April 1998, private farmers are required to sign contracts with local authorities in which they agree to specific conditions of land use and the volumes of commodities to be produced and delivered to the state. Crop-based product mix. The product mix of private farms is quite different from the traditional livestock-based agriculture of Belarus. Crop production accounts for about 85% of the value of output in private farms, compared to only 40% in farm enterprises. Since livestock production is less profitable due to low prices, this shift in product mix toward crops may be a xv Farm Sector Restructuring in Belarus reflection of greater responsiveness of private farmers to standard market signals. It also may reflect a severe shortage of investment funds in the private sector, which prevents individual farmers from moving into relatively capital-intensive livestock production. Higher productivity in private farming. As noted in Table B above, statistically the physical yields achieved by independent private farmers are not significantly higher than those in farm enterprises. However, a measure of productivity, based on a simple ratio of the value of outputs produced to the aggregate value of inputs used, points to a clear advantage of individual farms compared with farm enterprises. This ratio of outputs to inputs, known as total factor productivity (or TFP), was found to be 1.9 for individual farms and 0.9 for farm enterprises. The value of output produced by individual farmers is almost double the cost of inputs used, while farm enterprises do not recover the cost of inputs and thus create negative value. This finding refutes the traditional view of many policy makers in the former Soviet Union that large-scale farms are more efficient than small-scalefarms. Private farmers are well off and optimistic. Although private marginal a remain farms agriculture, phenomenon in Belarus they appear to be quite prosperous and optimistic. Among farm- Fig. C. Standardof LivingAmongthe Rural Population: What the Family Income Buys , Belowsubsistence l I - enterprise employees, over 90% E Subsistence complain that their incomes are r-'Employees unsatisfactory (Figure C, the two { IFarmers m to corresponding categories a Adequate subsistence and below-subsistence, where income is just sufficient to Comfortable buy food and daily necessities, and L iLL sometimes even not that). Among 50 60 70 80 40 30 20 10 0 private farmers, on the other hand, of respondents percent the proportion of respondents family reporting unsatisfactory incomes is less than 40%. On the other hand, over 60% of private farmers report incomes above the subsistence level, so that their families can afford to purchase clothing, other household items, and occasionally even durables. Among employees of farm enterprises, this group includes less than 10% of households. Private farmers also indicate that their standard of living actually increased during the last few years since they began operating independently, and about one-third of them expect the standard of living to continue increasing in the future. These signs of well-being and optimism among private farmers, compared with the gloomy atmosphere among farm-enterprise employees and even managers, indicate that private farming is quite successful in Belarus, despite the lack of support and encouragement by the government that creates an uneven playing field for individual farms and farm enterprises. xvi Summary and Conclusions: Lack of Conducive Environment Land reform and farm restructuring have the potential for improving productivity and efficiency of agriculture, but the accomplishments in Belarus in these areas have been very modest. Lack of genuine market-oriented restructuring of the large farm enterprises is one of the reasons for slow changes in agriculture. Another major reason for slow changes in the farm sector is lack of a conducive economic and policy environment. The economic environment in Belarus is still characterized by pervasive government controls, state orders in the form of fixedprice procurement quotas, and extensive trade restrictions. All these strongly distort the producer incentives and prevent recovery of the agricultural sector. The overall economic and policy environment remains the major impediment to creating market-based agricultural enterprises. After nearly a decade of "gradual reforms," the macroeconomic environmrentin Belarus retains most of the distortions of the Soviet command economy. Heavy government intervention is felt in all sectors of the economy through price controls, currency regulation, trade restrictions, procurement quotas, and subsidies. The government sets the prices in virtually every market. In agriculture, food processing, and retail food trade, the central government sets "indicative prices," or maximum profit margins that producers are allowed to charge. Trade restrictions are manifested in strict licensing requirements for commodity flows starting at the farm gate and in the establishment of maximum and minimum prices for imported and exported food commodities. Production and procurement quotas, which are a thing of the past in most CIS countries, have been retained for the large farm enterprises and, in a striking departure from previous practice, are now beginning to be imposed even on individual private producers. Compounding the distortions, the government attempts to offset the implicit taxation burden imposed by price controls and production quotas through a sweeping program of producer subsidies. On balance, however, the sector appears to be subject to net taxation despite the large amount of subsidies. Pervasive price controls cause food shortages in retail stores and dampen producer incentives. Administrative mechanisms that include procurement quotas, on the one hand, and quota-linked advance payments and commodity credits, on the other, are used to force farmers to sell their products to the state at non-negotiable conditions. Strict export and import controls impede trade flows with CIS neighbors and other European countries. The domestic currency is maintained at an artificially high level, and the government rations foreign exchange among authorized importers. The rigid economic regulation through price controls and procurement quotas virtually rules out involvement of private traders in food marketing channels. Nearly all input suppliers and food marketers are still owned and operated by state organizations or local government. The distortion of producer incentives caused by government's macroeconomic and sectoral policies is exacerbated by lack of restructuring at the farm level. The Soviet-style collective and state farms have not transformed into viable business-oriented operations responsive to market signals. They remain driven by production targets instead of productivity and profitability goals. Individuals remain salaried employees without incentives to improve productivity and efficiency. The state retains virtual monopoly of land ownership and severely restricts the transferability of land among producers, thus suppressing the growth of individual Farm Sector Restructuring in Belarus xvii farming and sacrificing the potential for productivity and efficiency improvements in agriculture. In April 1998 the government even extended the mandatory procurement quotas to private farmers. The individual sector does not appear to thrive in the distorted economic environment of Belarus: after an initial increase of 40% in production volume between 1990-1996 in response to a substantial increase in allocation of land to household plots, the agricultural output of the individual sector dropped 20% between 1996-1998. This is a vivid example of the damage that government interventions and controls cause in the agricultural sector and, of course, in the economy as a whole. While individual production is steadily increasing in all former Soviet Union states, it is dropping in Belarus. The macroeconomic policy environment distorted by heavy-handed government intervention is at present the main constraint to meaningful agricultural sector reform. Pervasive price and trade controls reinforced by strict procurement quotas are major obstacles for the emergence of a profitable, market-oriented, sustainable agricultural sector. Private initiative, land reform, and enterprise restructuring are unlikely to succeed in such an environment. Need for a Comprehensive Reform Program Successful recovery of Belarus agriculture and its transformation into a more efficient market-oriented sector requires implementation of a comprehensive package of agricultural reforms. Ideally, this package should include the following key elements: * creation of a liberalized macroeconomic environment that conforms to market principles and provides adequate incentives for improved efficiency and increased investments; * genuine farm-restructuring and land-reform procedures designed to improve farm management practices and individual incentives through creation of mechanisms for transfer of land to the most efficient producers; * development of demonopolized and competitive food processing and input supply industries through abolition of price, trade, and foreign exchange restrictions and elimination of administrative government controls; * creation of institutions required by a market economy; * clear resolution of responsibility and funding for social support services in rural areas; and * promotion of private sector development in rural areas as a solution to over-employment in agriculture. This is a comprehensive menu of actions, all of which are ultimately necessary for successful reform. However, the agenda is very broad, and specific steps in each area can be elaborated once a general agreement has been reached on the overall outline of the reform process. The implementation of such a comprehensive package of reforms naturally involves political, social, and financial difficulties. Yet the experience of a whole decade of "gradualist" approaches to reform in Belarus has clearly shown that avoiding reforms does not prevent xviii Summary and Conclusions: economic deterioration, and postponing critical actions only exacerbates an already difficult situation. Even a minimum reform program focusing on elimination of some of the macroeconomic distortions and creation of a market-oriented farm sector (the first two points in the comprehensive reform agenda suggested above) could have a tangible impact at what would appear to be an acceptable political and fiscal cost. Critical Issues for the Immediate Future As a minimum, Belarus should adopt a reform program that deals effectively with issues of government intervention in agriculture and implements land-reform and farm-restructuring procedures conducive to the emergence of market-driven and profit-oriented producers. Such a minimum program should address the five critical issues outlined below. * The first critical issue is drastic reduction of government intervention in agriculture, including abolition of price controls and procurement quotas. Belarus should eliminate price controls and procurement quotas, while at the same time reducing the level of subsidies and allowing market forces to shape producer decisions. Comparative analysis of 23 transition countries in Europe and Central Asia suggests that genuine macroeconomic and political reforms and overall economic recovery are the driving forces for reform and recovery in the agricultural sector. The 14 "successful" transition countries that are in advanced stages of overall economic reforms, in both Central Eastern Europe and the former Soviet Union, show healthy GDP growth and respectable agricultural performance. Economic recovery is closely correlated with market-oriented policy and institutional reforms. Thus, it is hard to expect significant recovery in Belarus agriculture despite restructuring efforts as long as policy and institutional reforms remain sluggish. Under the current overall economic and policy environment even the reorganized farms and, more importantly, the individual sector fail to perform to their maximum potential. * The second critical issue is allocation of secure land use rights to individuals instead of collectives, allowing freedom of choice in disposition of these rights. Belarus is an exception among its neighbors in the attitude toward allocation and transferability of use rights in land. In most transition countries, land rights are allocated to individuals, either in the form of physical plots or as paper certificates of entitlement. Individuals then decide whether to cultivate their land allotments independently or to leave them in profitoriented corporate farms that promise dividends or rent payments. This mechanism of land allocation changes the incentive structure of both individuals and managers, immediately raising the level of responsibility and accountability for everything that happens in production. Belarus has so far prevented allocation to individuals of use rights in commercial farmland (other than household plots). As a result, the Soviet-style farm enterprises have not changed and the rural population retains its status of unmotivated salaried employees. * The third critical issue is to ensure transferability of use rights in land with the aim of achieving improved productivity and efficiency. Farm Sector Restructuring in Belarus xix Even in established market economies, where private land ownership is the norm, farmers do not own all the land that they use. Many farmers find it more efficient to rent land from others, instead of buying. This requires the existence of markets in which land can be transferred from one user to another. Transferability of land is a necessary condition for improvement of productivity and efficiency in agriculture. Yet in Belarus use rights in state-owned land are completely non-transferable. In this respect Belarus is much more conservative than even Kazakhstan, Kyrgyzstan, and Tajikistan, where land use rights in state-owned land are freely transferable through subleasing among individuals. In Belarus, the options for leasing land are extremely limited, and even leasing from the state is practiced by individuals very infrequently. Farmers and households are thus deprived of the main mechanism for augmenting their holdings, which in other former Soviet republics plays an important role in the absence of markets for buying and selling of land. Successful agriculture can be developed without universal private ownership of land, but this requires free transferability of land among users. Prohibition of transactions in land prevents flow of resources to more efficient producers and is a serious obstacle to efficiency improvement in the farming sector in Belarus. * The fourth critical issue for the immediate future is to ensure that farm enterprises undergo deep internal restructuring of their operations and accept pure business objectives based on profitability and productivity. In the 14 "successful" transition countries in Europe and Central Asia that have achieved positive growth in GDP and agricultural product, their agricultural policies have produced a sector in which much of the land is individually cultivated and rights in land are individually controlled. Yet these countries have not switched exclusively to small-scale family farming. They generally support farms in a wide range of organizational forms, but on the whole these farms are smaller than the traditional socialist farms, both in their land endowment and in the number of workers they employ. The "successful" transition countries appear to be moving away from the Soviet pattern of farms that were large in terms of all three production factors - land, labor, and capital, in contrast to farms in market economies, which tend to be large in terms of either capital or labor, but not both. Size adjustment, however, is not the only factor that characterizes farm restructuring in the "successful" transition countries. The collective and cooperative farm enterprises in these countries have moved far beyond formal reorganization involving a mere change of legal registration. They have undergone deep internal changes in management and operations, transforming themselves into business-oriented entities motivated by productivity and profitability, instead of production targets. The experience in other transition countries shows that purely formal reorganization of farm enterprises, such as that in Belarus, will not produce beneficial economic impacts in agriculture. * The fifth critical issue is adoption of a coherent debt settlement program for farm enterprises that undergo genuine restructuring and introduction of hard budget constraints with a tangible threat of bankruptcy for farms that default on new debt. To encourage genuine internal restructuring into business-oriented operations, the government should develop a coherent program for resolving the old debt overhang of farm enterprises. On the one hand, farms that undergo genuine restructuring must be allowed to start operating without the burden of accumulated debt, which to a large extent is the result of the xx Summary and Conclusions: previous government interventions in the economic environment. On the other hand, debt resolution must be conditional on a genuine restructuring effort. Debt resolution and farm restructuring are interlinked and interdependent. After their debt problem is resolved, farm enterprises will have to operate under hard budget constraints and plan their operations so as to avoid unsustainable accumulation of new debt. It must be clear to the government and to farm enterprises that there will be no further write-offs of new debt in the future: restructured farm enterprises must observe normal financial discipline and bear full responsibility for the results of their operating decisions. This means that bankruptcy procedures should be initiated in the future against those farms that will not be able to meet their new repayment obligations. The five critical issues listed above constitute a minimum program of farm sector reforms for the next three to five years. They are a restricted subset of the comprehensive reform package recommended for the longer term, and as such they provide a concrete program of action for which specific implementation steps can be developed. Many other critical issues will require attention when the government begins to elaborate the actions for the implementation of the remaining components of the reform package. One of the more important issues for the next stage includes resolution of the impasse with maintenance and development of rural social infrastructure. This will necessitate allocation of sufficient budgets to local governments and development of alternative employment opportunities in rural areas to allow shedding of agricultural labor as a prerequisite for productivity improvement. Yet all these may be viewed as longer-term objectives, and the minimal five-step program proposed above can be expected to produce tangible benefits within a relatively short period of time. Adoption of a credible reform program by the government, even in this minimalist format, will create favorable conditions for assistance from international donors, including the World Bank, and a favorable atmosphere for foreign investors. 1. Sectoral Performance and the Policy Environment for Farm Restructuring While the focus of the present study is on land reform and farm restructuring, these topics must be considered in a sectoral and national context. Stagnating performance of the agricultural sector during the last decade provides the best possible justification for the need to restructure the existing farms. Yet sectoral performance is closely linked to deep distortions in the macroeconomic environment and in producer incentives. These in turn are associated with the pervasive intervention of the government bureaucracy in all aspects of routine operation of agricultural producers and other business operations in the country. Distortions in the macroeconomic environment and in producer incentives caused by government intervention in turn constitute serious impediments to farm restructuring and explain the observed stagnation. This chapter accordingly examines the issues of sectoral performance and macroeconomic distortions induced by government intervention, setting the context for the presentation of the empirical findings. For a more detailed treatment of these topics the reader is referred to a recent World Bank publication Belarus: Agricultural Policy Update 1998-1999 (ECSSD Environmentally and Socially Sustainable Development Working Paper No. 15, June 1999). 1.1. STAGNATING AGRICULTURAL PERFORMANCE Role of agriculture in the economy The natural resource endowment of Belarus (soil, climate, and water) is only of average quality for agriculture. During the Soviet period, Belarus had a relatively developed capacity for producing meat and dairy products, but this capacity was supported by centrally allocated imports of feed grain. Agriculture in that period accounted for 20% of the economy (as measured by its share in GDP, employment, and capital assets), which was about on the level of the entire Soviet Union. The share of agriculture in the economy somewhat declined after 1992 (Table 1.1), but the sector still retains its importance for the country, contributing 14% of GDP, more than in Russia and Ukraine today and much more than in the industrialized market economies. Table1.1. Agriculture'sSharein the Economy(in percentof respectivetotals) Share in GDP Share in assets Share in investment Share in employment 1990 20 20 28 19 1992 22 23 18 20 1994 18 17 9 19 1996 16 15 8 17 Sources: Belarus Agriculture. 1997 Statistical Yearbook, Minsk, 1998. Belarus Statistical Committee I 1998 14 16 7 16 2 The decline in the share of agriculture in the economy in the 1990s may be attributed to several factors. These include deterioration of the terms of trade for agricultural producers, as the prices received for farm products increased less than the prices paid for farm inputs; contraction of opportunities for traditional exports of agricultural commodities after the dissolution of the Soviet Union; and steep decrease of investment in agriculture. Agriculture's share of total investment dropped precipitously from 28% in 1990 to 7% in 1998 (Table 1.1): own investment funds dried up because of declining farm profitability, while a change in government priorities restricted allocation of investment funds from the state budget to the sector. The shrinking investment prevented replacement of equipment and modernization of technology, and thus had an obvious detrimental effect on the role of agriculture in the economy. Chapter One: Figure1.1. Dynamicsof GDPand Agricultural Output: 1990-1998 100 percentof 1990 90 _ 80 70 60 50 1990 1991 1992 1993 1994 I-GDP-Ag 1995 1996 1997 1998 product Figure1.2. Share of Crops and Livestockin Agricultural Production:1990-1998 100% percentof ag product l 80% 60% [E_r_ 40% _ Production Trends 0%_ Agricultural output contracted less than GDP in the initial period 19901995, but it failed to expand when the other sectors of the economy began to show signs of recovery in 1996 (Figure 1.1). Agricultural output declined continuously during the entire transition period, and by 1998 it had dropped to 70% of the 1990level. In contrast, GDP bottomed out in 1995 at 65% of its 1990 level, and subsequently recovered to 80%. 1990 1993 1998 Figure1.3. Share of IndividualSector in AgriculturalProduct: 1990-1998 100% 80% 60% WCollechives 40% 20% Two striking changes can be observed in the structure of agricultural output since 1990. Flrst, Belarus transformed from a livestock-based 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 Sectoral Performance and the Policy Environment for Farm Restructuring 3 agriculture to an agriculture with evenly matched crop and livestock production (Figure 1.2). The share of livestock production in agricultural output declined from 64% in 1990 to 48% in 1998. This was an inevitable outcome of the contraction of the artificially inflated livestock sector inherited from the Soviet period, when grain-poor Belarus was receiving practically unlimited imports of feed grain by central command from Moscow. Second, the share of the individual sector (mainly household plots) in agricultural output increased dramatically, rising from 25% in 1990 to 40% in 1998 (Figure 1.3). Individual production registered impressive gains during the 1990's, rising by 1998 to 120% of the 1990 level (Figure 1.4). The increase in individual production was mainly attributable to gains in crop production (which rose in 1998 to 140% of the 1990 Figure 1.4. AgriculturalProduction in Collectives and level), while livestock production in households remained largely unchanged (Figure 1.5). This positive performance of individual agriculture strikingly contrasted with the very poor performance of the socialized sector (collective and state farms), for which output dropped by 45% between 1990 and 1998 (a uniform drop was observed for both crop and livestock production), dragging down the country's total agricultural output (see Figure 1.1). Households:1990-98 The different trends of crop and livestock production have radically changed the product mix of the individual 160 percentof1990 140 120 -oeiC I-Households 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 Figure 1.5. Crop and Livestock Production in sector between 1990 and 1998, more so Households:1990-1998 than for the entire agricultural sector (as shown in Figure 1.2). Before transition, 250 percentof 1990 households also emphasized livestock production, but already then they had a 200 much more balanced product mix than the agricultural enterprises and the rest of the 150 -crops LivestoCk sector. Thus, in 1990, household production was 55% livestock, while in 100 enterprises livestock accounted for 67% of total output (Table 1.2). By 1998, the 5D , share of livestock production in 1990 1991 1992 1993 1994 1995 1996 1997 1998 households had dropped to 32%, with crops accounting for more than two-thirds of the output. This development in the individual sector in Belarus is totally at variance with the situation in Russia, Ukraine, and Moldova, where households have always concentrated primarily on livestock, and much less on crops, due to the very small size of their land allotments. Yet the livestock sector in Russia, Ukraine, and Moldova has never had to rely on grain imports for feed. Chapter One: 4 The increasing share of the individual sector in agricultural production is a reflection of the reallocation of land from socialized to individual farms. Total agricultural land has remained unchanged in recent years at about 9.3 million hectare (of which 6.3 million hectare is cultivated land). Yet there has been a significant transfer of land resources to individual farming. Land used by households more than doubled in the short period between 1990 and 1992 as a result of initial land reform programs (Table 1.3), while land use in the socialized sector decreased by 7%. Accordingly, the share of the socialized sector in total land use declined from 94% to 84% in that period. After the initial thrust, however, the land reform program stagnated and redistribution of land stopped (with the exception of a small trickle to new private farms that continued for two more years, until 1994). The structure of agricultural land use thus has remained frozen since 1992 with 84% in the socialized sector and 16% in the individual sector. The individual sector is represented mainly by household plots, and the private farms that began to emerge in 1990 still account for less than 1% of agricultural land. Table 1. 2. Share of Crop and Livestock Production by Type of Farms (in percent of total agricultural output) 1990 1993 1998 Crops 33 48 43 Livestock 67 52 57 Crops 45 48 68 Livestock 55 52 32 Farn type Production Agricultural enterprises Individual sector Source: Statistical Yearbook of the Republic of Belarus 1999: p 340, Minsk, 1999. The partial productivity of land, as measured by agricultural output per hectare, is substantially lower in socialized agriculture than in the individual sector. Household plots and private farms produce 40% of agricultural output on 16% of agricultural land, while collective and state farms produce 60% of agricultural output on 84% of agricultural land. The relative land productivity factor is about 2.5 for the individual sector compared with 0.7 for the socialized sector. In Russia, Ukraine, and Moldova, the exceptionally high productivity of land achieved by household plots is usually attributable to their specialization in livestock production, which requires very little land. This argument is less applicable for Belarus, where households actually specialize in crops, not in livestock, and the high productivity of land in the individual sector is probably a manifestation of the expected advantage of individual farming compared to collective agriculture. Table 1.3. Structure of Agricultural Land Use: Share of Socialized Sector, Household Plots, and Individual Farms in Total Agricultural Land 1996 1997 1998 1992 1993 1994 1995 1990 1991 Socialized sector, % 93.6 87.0 84.1 84.4 83.9 83.6 83.7 83.7 83.7 15.7 15.7 15.7 Household plots, % 6.4 12.9 15.5 15.1 15.5 15.8 0.6 0.6 0.6 0.6 0.6 0.4 0.5 0.0 0.1 Private farms, % 9267 9231 9230 9248 9255 9273 9330 9284 9272 Total agricultural land, thou. ha Source: Belarus Agriculture. 1997 Statistical Yearbook, Minsk, 1998; Statistical Yearbook of the Republic of Belarus 1998, Minsk, 1998. Sectoral Performance and the Policy Environmentfor Farm Restructuring 5 Changes in Prices and Use of Farm Inputs Figure 1.6. Terms of Trade in Agriculture and agricultural The decline of Output* Volumeof GrossAgricultural wth the is corrlated closly x numbers1991=1 (correlation=0.90) production is closely conelated with the deteriorating terms of trade for agricultural 1.5 producers (Figure 1.6; the coefficient of -Ters of trade correlationbetween the two series is 0.90). 1 The index number of terms of trade in agriculture, calculated as the ratio of aggregate prices received for farm products to the aggregate prices paid for o. -X farm inputs, declined steeply from 1 in 1991 to 0.3 in 1993 and then stabilized at o around 0.2-0.3 level. This essentially 1997 1996 1995 1994 1993 1992 1991 means that the prices agricultural ^Termsof tradecalculatedas the ratioof average(unweighted) producers receive declined 70%-80% over pricesof 10 majorfarmproductsand15majorfarminputs Source:BelarusAgriculture.1997StatisticalYearbook,Minsk,1998. time relative to the prices that they pay for inputs. In other words, while all nominal prices keep rising due to rapid inflation, the prices of farm products increase at a much slower rate than the prices of industrially manufactured farm inputs. The relative increase in the price of inputs adversely affects the level of agricultural output by depressing input use. The changes in input prices and quantities used are illustrated in Figures 1.7, 1.8, and 1.9 for fertilizer, fuel, and concentrated feed. The overall increase in real input prices led to a decline in the demand for these inputs. It is interesting to note that when the fertilizer prices stabilized and even slightly decreased after 1995, agricultural producers responded by immediately increasing the demand for fertilizer. Labor is the one farm input that strikingly deviates from the theoretical dependence of demand on prices. The real price of labor, calculated as the CPI-deflated average yearly wage in agriculture, declined steeply between 1991 and 1994 (dropping to 20% of the 1991 level) and then rose almost as steeply to 60% of the 1991 level in 1997 (Figure 1.10). Agricultural employment, on the other hand, continued to decrease steadily from 1991 to 1997, despite the cheaper price of labor. The level of agricultural employment in 1997 reached about 70% of the 1991 level. The lack of relationship with the price of labor indicates the existence of large labor redundancies in agriculture: farm enterprises continued shedding labor despite lower wages because the labor force was chronically underutilized. Moreover, the decrease in agricultural employment is a continuation of a long-term trend observed also in Russia and Ukraine. The outflow of labor from agriculture in these countries is explained by deteriorating "terms of employment": wages earned in agriculture become progressively less attractive relative to wages in other sectors. In Belarus, agricultural wages dropped from virtual parity with the national average wage in 1990 to 0.6 of the national average in 1998. Of course, agricultural workers always supplement their wages with income from the household plot, but the steep erosion of agricultural wages provides a clear incentive for migration of labor from agriculture. 6 Chapter One: Figure 1.7-1.10. Quantity and Prices of Some Major Farm Inputs in Belarus Agriculture Figure1.7. Quantityand Priceof Fertilizer PurchasedbYFarm Enterprises Indexnumbers1991=100 300 _____ Figure1.9. Quantityand Priceof Concentrate Purchasedby FarmEnterprises Indexnumbers1991=100 _ 300 250- 250- 200- 200 Ff~~~~~~~~~~~~~~~~~~~~~~~ 150 - 150 C = S~ / -Quantity 150 -Price 100 -Price 100 50- 50 0 1991 1992 1993 1994 1995 1996 0 1991 1997 Figure1.8. Quantityand Priceof Fuel Purchasedby FarmEnterprises Indexnumbers1991 =100 1992 1993 1994 1995 1996 1997 Figure1.10.Quantityand Priceof Labor Employedin Farm Enterprises Indexnumbers1991=100 700 120 600 100 500400 - Q 30-- 60 _ -0-Price 20 0 1991 -Quanity ~~~~~~~~~~~~~Price 20 100 S0n 0 1992 1993 1994 1995 1996 1997 1991 1992 1993 1994 1995 1996 1997 Source:BelarusAgriculture. 1997BelarusStatistical Yearbook, Minsk1998. The decrease in input use has produced substantial increases in the productivity of major farm inputs (Figure 1.11). The partial productivity of inputs was calculated as the ratio of the value of agricultural output (in constant prices) to the quantity of each input used in agriculture. Initially, the productivity of inputs dectialnedy d toh the veryucsteey Figure 1.11. Partial Factor Productivity of Major Farm Inputs: Value of AgriculturalOutput per Unit of Input dr inp declined due to the very steep drop in agricultural output and the slower 30 downward adjustment of input use. After 1994, when the rate of decline in agricultural production slowed down 25 while input use continued to drop due to 15 rising prices, the partial productivity of inputs began to increase impressively. This also applies to the productivity of agricultural labor, which decreased faster lo than agricultural output since 1993. , LABOR FERTILIZER 20 5 CONCENTRATE C 1991 1992 1993 1994 1995 1996 1997 Source: Belarus Agriculture. 1997 Belarus Statistical Yearbook, Minsk, 1998. Sectoral Performance and the Policy Environment for Farm Restructuring 7 The partial productivities are calculated for each input separately as the ratio of the value of agricultural output to the quantity of the particular input used. By their very nature, partial productivities represent various factors of production taken in isolation, and do not reflect the full picture of changes in agricultural efficiency. An accepted measure of overall efficiency is the so-called total factor productivity (TFP), which is calculated as the ratio of the total value of output to the total value (and not quantity) of all inputs used in agriculture. The use of values makes it possible to aggregate all different factors of production - labor, capital, and purchased farm inputs - into one number for productivity calculations. TFP thus incorporates information about both quantities and prices of all products and all inputs, and it is therefore used as an expression of total agricultural productivity (as opposed to partial productivities of land, labor, and other specific inputs). Despite the encouraging picture presented by the increase in partial productivities of labor and other major inputs, the total factor productivity of Belarusian agriculture declined from 1.06 in 1991 to 1.02 in 1998. The total factor productivity remains greater than 1, which implies that each unit of cash spent on inputs produces more than one unit of output value. However, the gap is very small, of the order of 2%, which means that the value of output is only slightly higher than the aggregate value of all inputs used in production. The decline in total factor productivity since 1991 is the result of unfavorable changes in terms of trade for agriculture (see Figure 1.6). Input prices increased faster than output prices, while the volume of output decreased. As a result, the relatively modest decrease in the quantity of inputs used failed to compensate for the other unfavorable trends, and the value of input use (quantity of inputs times prices paid) increased faster than the value of output (quantity of output time prices received). These effects combined to produce a certain decline in total productivity of agricultural factors of production since 1991. 1.2. PERVASIVE GOVERNMENT CONTROL AND PERSISTING DISTORTIONS IN THE MACROECONOMIC ENVIRONMENT The dissolution of the Soviet Union in 1991 signaled the beginning of diverse attempts to reform the ailing economic environment inherited by the new independent states. The rate of implementation of reform programs varies widely across the region, yet Belarus stands out among the former Soviet republics in its decision to adopt a particularly slow and gradual approach to economic restructuring. The Belarusian approach to reform leaves a large role for the government as a stabilizer of what it perceives as "inherently unstable free market forces." In this role, the government resorts to a set of agricultural policies that, on the one hand, include measures involving implicit taxation of the sector and, on the other hand, provide subsidies in an attempt to partially offset or mitigate the harsh taxation effect. Although producers are generally exempt from direct taxes on their agricultural earnings, the system of fixed-price procurement quotas imposed by the government reduces producer revenues substantially below market levels and thus constitutes an implicit tax on agriculture. The government implements these policies as tool to achieve the traditional goal of low food prices and low wages for the urban population. The implicit taxation component is partially offset by a broad range of subsidies and supports that the government provides to agriculture in the form of subsidized farm inputs, subsidized credit, interest-free marketing advances, investment grants, and debt write-offs. 8 Chapter One: Unfortunately, the available data are not sufficient to estimate the net effect of these conflicting measures. Yet the general feeling among producers is that they are losing more through government controls than what they are gaining through government support. This is clearly confirmed by the findings of the farm-level survey, with over 70% of respondents (both farmenterprise managers and private farmers) reporting that the total tax burden is greater than the total amount received in subsidies (see Table 5.10 and the discussion around it in Chapter 5). Producers would probably be willing to give up most of government subsidies if they could be assured of free access to markets and were allowed to sell their output at market prices. Heavy government intervention is felt in all sectors of the economy through price controls, currency regulation, trade restrictions, procurement quotas, and subsidies. The government sets the prices virtually in every market. In agriculture, food processing, and retail food trade, central government sets "indicative prices" or maximum profit margins that producers are allowed to charge. Trade restrictions are manifested in strict licensing requirements for commodity flows starting at the farm gate and in the establishment of maximum and minimum prices for imported and exported food commodities. Production and procurement quotas, which are a thing of the past in most CIS countries, have been retained for the large farm enterprises and are now beginning to be imposed even on individual private producers. The penalty for failure to meet the procurement quotas is draconian: the delinquent private producer may lose the land allocated to the individual farm. The government attempts to mitigate the implicit taxation burden imposed by price controls and production quotas through a broad program of producer subsidies. Thus, after nearly a decade of "gradual reforms," the macroeconomic environment in Belarus retains most of the distortions of the Soviet command economy. Administrative mechanisms that include procurement quotas, advance payments, and commodity credits are used to force agricultural producers to sell their products to the state. Strict export and import controls impede trade flows with CIS neighbors and other European countries. The domestic currency is maintained at an artificially high level, and the government rations foreign exchange among authorized importers. The combination of price and exchange rate controls with procurement quotas virtually precludes involvement of private traders in food marketing channels. Nearly all input suppliers and food marketers are still owned and operated by state organizations or local government. The Soviet-style collective and state farms have not been transformed into viable commercial operations responsive to market signals. The state retains virtual monopoly of land ownership and severely restricts the transferability of land among producers, thus suppressing the potential for productivity and efficiency improvements in agriculture. As a result of these distortions, urban consumers do not benefit from the government's policy of maintaining low food prices. On the contrary, they are faced with permanent shortages of food products in state-owned retail stores that are obliged to sell them at low government-controlled prices. The remaining part of this section discusses in more detail the various components of government intervention in the sector. The discussion focuses on the full menu of price controls, procurement quotas, trade regulation, currency controls, and producer support through various government programs. Sectoral Performance and the Policy Environmentfor Farm Restructuring 9 Price Controls and Procurement Quotas Price controls are prevalent at all stages of the food chain and cover an increasing spectrum of goods. The list of "socially important goods" that are subject to price controls is 118 items long and includes all food products. Price controls are imposed on all enterprises, irrespective of type of ownership. The government is increasingly involved in regulating prices partly because the public in Belarus, as in many other transition economies, does not have a clear grasp of the welfare effects of price controls. Opinion polls reveal that the public supports at least some degree of government intervention in price formation in the belief that this is a shield against price increases. Administrative methods of price regulation are widely used in Belarus. The government's goal is to maintain low food prices for the urban population as a justification for low wages. The Ministry of the Economy accordingly sets a maximum limit on allowed price changes given the official projections of inflation. The 1998 economic plan allowed a limit of 2% per month on producer price changes. Authorities from the State Price Committee are responsible for monitoring the prices and fining delinquent producers. Since manufactured inputs not used by consumers are generally free from such restrictions on price increases, the combination of price controls for farm products and inflation imposes a severe strain on the profits of primary producers. Many producers are facing very low or even negative profit margins because their costs grow due to inflation, while the prices they receive remain frozen. Procurement quotas, advance payments, commodity credits, and export controls force producers to sell to the state at artificially low "indicative" prices. The government effectively dominates all agricultural markets, except potatoes and vegetables, through a system of procurement quotas that cover 70%-80% of sales for all agricultural producers, including private farmers. Strict administrative measures are applied to ensure that producers fulfill their quotas despite unfavorable prices. For example, a recent government order prohibits the sale of cattle and milk through independent channels before producers have delivered their quotas to stateowned processors (Council of Minister's Order No. 247 "On Procurement of Meat and Milk Products," February 16, 1999). Similar orders are in place for other commodities. The procurement process itself is highly centralized. The schedule of procurement sales is approved and closely monitored by the Council of Ministers. Specific procurement targets are set for each oblast and raion. Local authorities are responsible for reporting each week about the progress of the "procurement campaign." Advance payments and commodity credits constitute another type of intervention that require producers to commit certain amounts of future crops for procurement on government terms. Export restrictions discussed below leave producers virtually no option other than to sell their commodities to procurement agencies. Trade Regulation and Currency Controls Trade is centrally regulated through export and import price controls, licensing, and foreign-exchange surrender requirements. Minimum prices for exports and maximum prices for imports are widely practiced as a tool of trade regulation. Export and import price controls have become stricter over recent years and are applied to an increasing range of commodities. As of 10 Chapter One: late 1998, minimum export prices were binding for all exporters, and the list of goods subject to minimum export prices included food products, fertilizers, hides, and skins. Violation of minimum export price regulations results in a penalty equal to the difference between the minimum indicative price and the actual price. Minimum export prices do not apply to intergovernmental agreements executed by state trading companies. While minimum export prices are undesirable, such discriminatory exemptions leave many possibilities for corruption and implicit transfer of funds. Price controls are not the only impediment to foreign trade. Complex licensing and contract registration requirements also restrict exports and imports. Agricultural producers are required to get permission from the Ministry of Agriculture for export of any food product except vegetables. Export of vegetables is not free either: it is regulated by oblast authorities. The exporter must get written permission for each separate batch of goods for export. If the oblast where the producer is registered did not fulfill its regional procurement target, permission to export is not granted. The Ministry of Agriculture limits to 30% the maximum share of total production that can be exported. After receiving permission from the Ministry of Agriculture, the exporter must register the contract with the Ministry of Foreign Economic Relations. If the contract price is lower, than the minimum export price, the contract will not be registered. Owners of household plots need a document from local authorities certifying that they are eligible to export farm products from their plot. Currency controls are another tool to regulate foreign trade. Exporters are subject to 40% surrender requirements at the official exchange rate, which is one-third of the unofficial market rate. It is estimated that these surrender requirements are equivalent to at least a 10% tax on export revenues. This implicit taxation naturally shifts an increasing number or export transactions to barter trade (the share of barter trade increased from 15% of total trade in 1993 to 35% in 1998). Government revenues from exports suffer because of the steady increases in barter and numerous administratively granted exemptions from surrender payments: only 25% of export revenues were sold to the government in 1997 compared to 46% in 1996. The gap between the official and the market exchange rate is extremely wide and is increasing. The Belarus National Bank does not have sufficient reserves to support the official exchange rate. The main disadvantage of the policy of overvalued currency is that it discourages exports and encourages imports, i.e., it discourages domestic agricultural production. The two official goals of trade policy are protection of domestic producers from foreign competitors and export promotion. The main problem with the existing trade regulation mechanisms is that they are inconsistent with the declared goals of trade policy. Minimum prices and surrender requirements discourage exports, while exchange rate controls supporting an overvalued currency make imported goods more competitive. Reliance on purely administrative instruments of trade regulation makes the system prone to arbitrary decisions by government officials and provides a fertile ground for favoritism and corruption. Sectoral Performance and the Policy Environmentfor 11 Farm Restructuring The Counterplay of Taxation and Support Agricultural producers are exempt from many explicit taxes in Belarus (including deduction of 1% of sales revenue to Agricultural Support Fund and tax on profits from sale of own farm products). On the other hand, the government imposes a heavy implicit tax on the sector through price controls, procurement quotas, and foreign-currency surrender requirements, all of which reduce the income of agricultural producers below the level of market prices. This implicit taxation is a tool for the government to achieve the goal of acceptably low food prices to consumers, and its negative effect on agricultural producers is traditionally offset, or at least mitigated, by wide-ranging financial support from the state budget. The net effect of these conflicting policies is difficult to quantify due to high inflation and the complex nature of the methods used. Table1.4. GovernmentSupportof AgriculturalProducersin Belarus 1992 1998 248 Working-capital support, million US$ 240 Investment support, million US$ Total support, million US$ 120 48 360 296 Structure of sources, in percent: 100 100 Agricultural Support Fund -- 19 Central Bank credits 54 44 Government budget 46 37 Structure of uses, in percent: Input subsidies 100 46 100 59 Harvest campaign 19 19 Capital investments in agriculture 33 16 1 6 2660 2523 Machinery purchases Number of farms Support per farm per year, thousand US$ Sales per farm, thousand US$ 135 117 NA 275 Production per farm, thousand US$ NA 390 Number of workers 824 635 Support per worker per year, US$ Wages in agriculture per year, US$ 437 467 240 456 Note: Conversion to dollars is based on exchange rate of 192 rubles in 1992 and 138,380 (denominated) rubles in 1998. The latter figure is the market exchange rate, as opposed to the official exchange rate of 50,000 rubles. The level of government support to working-capital needs of agricultural producers remained stable in dollar terms at around $250 million throughout the 1990's. Investment support, on the other hand, declined dramatically from $120 million in 1992 to $48 million in 1998. The share of investment support provided by central and local government budgets for construction, land reclamation, and other capital projects shrank from 38% of total investment in agriculture in 1992 to 31% in 1998. Working-capital support was mainly used to subsidize farm inputs and to finance the costs of the harvest campaign (Table 1.4). The government spent in 12 Chapter One: 1998 the equivalent of $120,000 per farm enterprise, which is about 40% of average farm sales. The amount of government agricultural spending per employee exceeded the average annual salary in agriculture (Table 1.4). This level of support obviously places a heavy burden on the government's financial resources. Local budgets and local tax initiatiVes in the form of regional agricultural support funds are beginning to play a much more important role in providing support to producers. In 1998, local budgets provided 20% of all agricultural support compared to 17% from the central budget. Support from the local budget, however, involves an emphasis on local tax revenues, which may lead to an incoherent and distorted tax system. For instance, the oblast authorities in Minsk and Grodno introduced a local tax on agricultural machinery purchases in addition to the value-added tax collected by central tax authorities. As on the national level, the net effect of additional local subsidies and additional local taxes is unclear. Input subsidies remain the main component of government spending in the sector, accounting for 60% of total support to agriculture (Table 1.4). Local budgets are particularly active in providing input subsidies to producers. Thus, the central budget funded only 40% of the fertilizer purchase program in 1998, and its contribution was matched by another 40% from the oblast budgets (the farms paid the remaining 20%). Most of the tax revenues raised through regional agricultural support funds at the oblast level are used for input subsidies. For example, in Mogilev Oblast, input subsidies in 1998 accounted for 75% of the total allocation to agricultural programs from the local budget. A new form of subsidy begun in 1998 involves payments intended to compensate milk producers for differences in natural conditions in different parts of the country. These payments are administered in the form of a price premium per ton of milk delivered to state procurement agencies. Sales in the free market do not entitle the producers to these price premiums. This new subsidy is not reflected in Table 1.4, because the scope of its implementation is still unclear and information received from local authorities (as well as from the 1999 farm survey) suggests that the amounts involved are quite limited. Years of pervasive government intervention have eliminated every sense of independent responsibility and accountability among the managers of farm enterprises. They continue to operate as in the Soviet era, in an environment prone to moral hazard and dominated by soft budget constraints. The results of these policies for agriculture have been highly discouraging. The agricultural sector is in decline. An increasing number of farm enterprises are becoming unprofitable, and the debt of agricultural enterprises is rising. Lack of investment funds is responsible for deterioration of machinery and equipment, undermining the production potential in agriculture. At a time when the best managerial talents are needed to restructure the sector for better efficiency and to restore its profitability, the pool of collective farm managers is deteriorating as the most qualified individuals migrate to more highly paying jobs outside agriculture. Sectoral Performance and the Policy Environment for Farm Restructuring 13 1.3. CURRENT PROPOSALS FOR IMPROVED AGRICULTURAL SUPPORT POLICY Both the politicians and the academic community recognize that the economic situation of Belarus is far from satisfactory and that the country lags behind its neighbors on the path to market reforms. The overall dissatisfaction with the economy in general and with agriculture in particular is fertile ground for periodic proposals and programs that outline directions for adjustment and change. Yet these proposals always accept the existing system with its pervasive government intervention and distorted macroeconomic environment, and only tinker with technical details. The proposals published in 1998 did not include any new principles. They retained the two main concepts of state procurement and subsidies in proportion to farm sales to the state, juggling with amounts, percentages, and other details. A novel element in the 1998 program was the emphasis on profitability as an eligibility criterion for credits and other benefits: it was proposed to allocate government credit only to profitable farms and farms able to repay the loans; unprofitable farms were to be entitled only to tax relief and rescheduling of interest payments. The program included a partial attempt to solve the problem of farm debt accumulation, but again through strictly administrative, centrally controlled measures: it was suggested that 40% of accounts receivable of agricultural producers conducting business through the state-controlled agricultural bank would be automatically deducted in repayment of overdue debt. This proposal, if implemented, would clearly increase the demonetization of agriculture. The latest proposals prepared by the Belarusian Academy of Agricultural Sciences in 1999 for the years 2000-2005 set food self-sufficiency as the main goal of agriculture. The proposal actually calculates "the minimum critical levels" of agricultural production by commodity "below which dependence on imports sets in and economic security is weakened." Food self-sufficiency is the traditional goal of closed command economies, and is an inappropriate strategic objective for countries that operate in open markets with free trade flows. The new proposals accept the existence of price controls and state procurement as permanent features of the system. They adjust minor technical details of these features and basically recommend that the controlled prices be increased to cover the actual costs and to ensure producer margins of not less than 20%. Cost-based pricing is well recognized as a sure prescription for persistent inefficiency, and the new proposal removes all incentives for farm enterprises to improve their performance. Farms should be allowed to compete in the market place, so that the most profitable ones survive on their own merit and the inefficient ones are forced to restructure or disappear. The proposals acknowledge the need for farm restructuring and land market development. They rightly advocate the importance of agricultural cooperation, both local and regional, for rural reform and development. However, the language used seems to suggest that, in line with the prevailing psychology in the country, these will be cooperatives organized by government fiat. This approach contradicts the fundamental principle of voluntary, selfdetermined association of members in market-oriented cooperatives. Cooperation is indeed a fundamental tool for agricultural and rural development, but international experience suggests that cooperation should be restricted to farm services, and not agricultural production, and that 14 Chapter One: cooperatives should be formed by the rural population on an entirely voluntary basis, without coercion or intervention from the outside. The government's role is to support cooperatives by providing an appropriate legal framework for their development and survival, and not to interfere in their strategy and management. The proposals further suggest that household plots should pay for the services they receive from the farm enterprise with which they are associated. The payments should be made mainly by debits to the share dividend account of the member-households, which is a common practice in farmers' associations and cooperatives all over the world. This suggestion provides an effective market solution to the perennial problem of the relations between the household plots and the farm enterprise. The introduction of charges for farm enterprise services to households will regularize these relations and place them on a normal business-like foundation. The role of the farm enterprise will gradually change as it evolves into a service cooperative for memberhouseholds. Moreover, elimination of free transfers to household plots will make a positive contribution to farm enterprise revenues and profits, and probably enable it to allocate additional resources to the maintenance of the social infrastructure in the village. Although households will initially object to the demand to start paying for services that have always been free, the resulting improvement in the financial situation of the farm enterprise will contribute to better quality of life of the entire rural population The ideas on farm restructuring in this document are very rudimentary, and there is no discussion of the specific organizational and operational features that must change in the transition from administrative-command structures to market-oriented structures. The proposals do not come to grips with the politically sensitive issue of land ownership, and the development of land markets is viewed only in the context of leasing arrangements, especially for private farmers. Moreover, the authors of the document do not seem to acknowledge the fundamental difficulty with any fami restructuring attempts in a constraining and distorted economic environment characterized by pervasive government controls. The overview of existing constraints for agricultural development and farm reorganization shows that most of the major features of the command economy have been preserved in Belarus. The macroeconomic policy environment distorted by heavy-handed government intervention is at present the main constraint to meaningful agricultural sector reform. A profitable, market-oriented, and sustainable agricultural sector cannot emerge in an economic environment characterized by pervasive price and trade controls with strict procurement quotas, on the one hand, and by soft budget constraints that imply debt write-offs and bailouts for unprofitable farms. Privatization, land reform, and enterprise restructuring, however well designed, are unlikely to succeed in an environment riddled with such non-market obstacles. 2. Legal Framework for Land Reform and Farm Restructuring Belarus is the only former Soviet republic outside Central Asia that does not allow private ownership of all agricultural land. Only the land in household plots may be privately owned, while all land for commercial farming remains state-owned, as in the Soviet era. The pool of privately owned land in Belarus is limited to less than 20%, which is the estimated potential share of household plots. In the process of restructuring, farms divide their non-land assets among member-shareholders, but land may not be divided. Land shares - a standard form of certificates of entitlement to land distributed to rural people in CIS countries that have not reached the stage of mass distribution of land plots - are a forbidden concept in Belarus. 2.1. STATUS OF LAND REFORM The first wave of land reform legislation was adopted in 1990-1991, when Belarus was still part of the Soviet Union and Gorbachev's policies in Moscow encouraged movement and change in all Soviet republics. A chronology of legislative acts for land reform and farm restructuring that began to form in the early 1990's is presented in Table 2.1. The 1990 Land Code for the first time allowed the creation of individual farms outside the collectivist framework. Such farms became typically known as private or peasant farms, to distinguish them from the household plots of collective members. The 1990 Land Code established the right of a member of a collective agricultural enterprise to exit with a share of land for the purpose of starting a peasant farm; individuals who were not collective members could apply to local authorities for an allocation of land. The land for the creation of peasant farms was to be allocated by the local administration from the land of the collective agricultural enterprise where the applicant worked or from the state land reserve. The 1990 Land Code stipulated that private farmers should generally get land of at least average quality. The size of a private farm, however, was limited to 50 ha, and the land was to be allocated to private farmers in lifetime inheritable possession, a standard Soviet form of tenure that ensured security of land use without any transfer rights. Thus, the land in peasant farms could not be divided into subplots, sold, exchanged, or subleased. In a sense, the new private farms were not private at all, as land remained in exclusive state ownership and was given to farmers in use rights. Nevertheless, these farms were "private" in the very important sense that each was operated by a private individual who generally owned the non-land assets and could make production and marketing decisions independently of collective dictates and government intervention (at least until the mid-1998 policy imposed procurement quotas on private farms also). 15 16 Chapter Two: In addition to allowing the creation of individual farms, the 1990 Land Code also laid the ioundation for internal restructuring of collective agricultural enterprises. It allowed the creation of autonomous production cooperatives within the collective farm enterprise, each with an appropriate allocation of land from the holdings of the collective farm. The most important decision that led to major distribution of land to individual holders was the December 1990 Resolution of the Belarus Supreme Soviet on Land Reform that doubled the maximum allowed size of a household plot to one hectare. According to this resolution, a state reserve was formed for distribution of land to individuals desiring to increase the size of their household plot or to start a private farm (as allowed by the Land Code). The local authorities were instructed to create lists of applicants and to distribute land from the reserve for the two categories of users. Table 2.1 Chronology of Land Reform and Farm Reorganization Legislation in Belarus Land Code of the Belarus Soviet Socialist Republic (December 11, 1990, amended January 4, 1999) Resolution of the Supreme Soviet of the Belarus Soviet Socialist Republic "On Land Reform" (December 11, 1990) Law of the Belarus Soviet Socialist Republic "On Peasant Farms" (February 18, 1991) Resolution of the Council of Ministers of the Belarus Soviet Socialist Republic No. 277 "Major Principles of Land Use in the Belarus Soviet Socialist Republic" (July 15, 1991) Law of the Belarus Soviet Socialist Republic "On Payments for Land" (December 18, 1991) Law of the Republic of Belarus "On Land Ownership" (June 16, 1993, amended January 4, 1999) Resolution of the Council of Ministers of the Republic of Belarus No. 539 "On the Amount of Payment for the Land Title" (August 12, 1993) Resolution of the Council of Ministers of the Republic of Belarus No.679 "On Normative Land Prices" (October 7, 1993) Law of the Republic of Belarus "On Amendments to the Law of the Republic of Belarus On Land Ownership" (February 21, 1995, amended January 4, 1999) Law of the Republic of Belanis "On Amendments to the Law of the Republic of Belarus 'On Land Ownership"' (December 21, 1997, amended January 4, 1999) Law of the Republic of Belarus "On Amendments, Changes and Additions to Some Laws of the Republic of Belarus Regulating Land Tenure" (December 31, 1997, amended January 4, 1999) Presidential Decree No. 95 " On Measures of Development of Peasant Farms and their Government Support (March 3, 1998) Presidential Decree No. 97 " On Financial Support and Reorganization of Non-Profitable Agricultural Enterprises" (March 3, 1998) Presidential Decree No. 193 " On Some Measures to Improve the Government Regulation of Peasant Farms" (April 1, 1998) Civil Code of the Republic of Belarus (December 7, 1998) Land Code of the Republic of Belarus (January 4, 1999) Presidential Decree No. 29 "On Government Support of Industrial and Farm Input Supply Enterprises that Decided to Merge with Non-Profitable Agricultural Enterprises" (January 15, 1999) The decision to enlarge the household plots led to rapid growth of individual subsistence farming, with the share of households rising from 5% of agricultural land in 1990 to 12% in 1997 (Figures 2.1 and 2.2). By the end of the 1990's, over 1.5 million households controlled more 17 Legal Framework for Land Reform and Farm Restructuring than 900,000 hectare of agricultural land in plots averaging 0.7 hectare. The peasant farms during the same period grew to control about 1% of agricultural land, so that in total the individual sector in Belarus (household plots and peasant farms combined) reached 13% of agricultural land in 1997, which is about the average for all CIS countries. In 1993, the Law on Land Ownership allowed private ownership of land in household plots, but not for other categories of land users (private farmers and farm enterprises). All agricultural land outside household plots, i.e., land intended for commercial farming, remained in state ownership. Farm enterprises were granted permanent use rights to the land that they controlled, while the land in private farms was generally given in lifetime inheritable possession. Most of the original land reform legislation was radically amended and largely superseded in 1998-1999 by two major laws that now regulate land ownership and land use in Belarus - the Land Code and the Civil Code. The new Civil Code was adopted in December 1998, and it was followed within one month by the adoption of the new Land Code in January 1999. Fig. 2.2. Structure of Land Tenure: 1997 Fig. 2.1. Structure of Land Tenure: 1990 Collectvefarms 62% 62%~~~~~~~~~~~~~~5 Collectivefarms Private farmers 1% Privatefarmers 0% State farms Household 5% plots Statetarms Householdplots 33% ~~~~~~~~~~~12% The 1999 Land Code recognized two forms of land ownership in Belarus - state ownership and private ownership. All agricultural land in Belarus is in exclusive state ownership, and is given to agricultural producers in use rights. There are two exceptions to this sweeping rule: (a) up to one hectare of agricultural land in a household plot may be privately owned; and (b) up to 0.25 hectare of agricultural land under and around a private house may be privately owned. Land in private ownership may be sold, traded, mortgaged, leased out, and bequeathed to heirs. In addition to private ownership, the 1999 Land Code recognized three types of land-use rights: term-use rights, lifetime inheritable possession (for individuals), and permanent use rights (for enterprises). Land given in use rights is not transferable and may not be subject to any transactions. Land in lifetime inheritable possession may actually be bequeathed to heirs only when there are no buildings or other structures on it. Thisturious and highly unusual restriction means that private farmers can only pass the fields to their heirs, but not the land under farm buildings erected in their lifetime. Land may be leased out only by the owners, which include the local government as the owner of state land and private individuals as owners of household plots. 18 Chapter Two: The 1999 Land Code reiterated the right of individual members in a collective to exit with a plot of land for the establishment of a private farm. The same right of exit with land was given to a group of individuals deciding to form a new collective or cooperative outside the existing farm enterprise. The land that former members receive on exit is given in use rights and remains in state ownership. The new Land Code relaxed some of previous restrictions on individual land use: * owners of household plots are now allowed to lease in up to two hectares of land for subsistence farming, thus overcoming the one-hectare limit on privately owned land; * private farmers may now have up to 100 hectares of agricultural land in lifetime inheritable possession (which is not private ownership), up from 50 hectares allowed under the 1990 Land Code; and, * private farmers are allowed to lease in any amount of land. The 1999 Land Code provided for the establishment of new institutions that are necessary for proper functioning of land market (e.g., creation of the land cadastre). The new Civil Code may also have a positive impact on the development of land markets in Belarus through relaxation of leasing and mortgage restrictions. Thus, leaseholders are now allowed to sublease and even mortgage the land that they hold in use rights. However, the new laws also contain some new restrictions on the land-use rights of agricultural producers. For example, the new Land Code lists various reasons when the land owner (which in Belarus is the local government for all practical purposes) may terminate the land-use rights of an agricultural producer (a farm enterprise or an individual farmer). Some of these reasons are not even in the producer's control. For example, a farm may lose its use rights to land if the crop yields in a particular year are lower than the yields that are considered to be "normal" for the region. This provision clearly introduces a large decree of arbitrary administrative intervention and leads to harmful uncertainty of tenure. Local authorities also have the right to dictate cropping patterns to land users. Such arrangements prescribed from the top limit the ability of agricultural producers to allocate land efficiently. Despite some relaxation of restrictions on land use and ownership in recent years, the main fundamental deficiency remains in both the Civil Code and the Land Code: these laws still do not allow private ownership of land by commercial agricultural producers and they severely restrict transferability of land among producers. The unresolved issues of land ownership and transferability remain major obstacles to change in the agricultural sector. Genuine restructuring of farm enterprises for greater efficiency and productivity requires radical reconfiguration of land holding patterns and adjustment of farm sizes. These are all but impossible in the present legislative environment, which even prohibits distribution of paper land-share certificates in the process of farm reorganization. 2) 19 Legal Framework for Land Reform and Farm Restructuring 2.2. LIMITED PROGRESS IN FARM RESTRUCTURING Progress in farm restructuring in Belarus remains limited so far. During the last ten years there has been little change in the organizational type, numbers, and average size of farm enterprises in Belarus. Almost all of the existing 2,500 farm enterprises are represented by largescale collective and state farms that control on average 3,000 hectare of land per farm. Table 2.2 shows that the adjustment in average farm size as measured by changes in land use during the last decade has been much slower than the observed declines in farm output and input use (labor, fertilizer, machinery). The partial productivity of land is thus declining, while the partial productivity of agricultural labor appears to be on the increase due to attrition of labor. Table 2.2. Main Characteristics of Farm Enterprises in Belarus (data per farm enterprise) 1990-1997 change, % 1997 1990 Agricultural output in constant 1990 prices, million rubles 5.146 3.834 -25 Land, ha 3449 3018 -12 Number of workers 456 306 -37 Number of tractors 50 40 -21 Number of combines 14 8 -37 Fertilizer use, kg per ha 271 147 -46 By 1998, less than 4% of farm enterprises had reorganized into new legal entities (Table 2.3). In the entire country, 92 farm enterprises are classified as reorganized. The definition of a reorganized farm in Belarus is very vague. Any farm that has changed its legal status from collective, state farm or inter-farm association to another legal form is classified as reorganized. The new organizational forms into which farms reorganize include collective agricultural enterprises (a new name for the traditional kolkhoz, or collective farm), agrofirms, partnerships, and joint stock companies. Table 2.3. Changes in the Number of Farm Enterprises by Organizational Form 1995 1994 1993 1992 1991 1990 1996 1997 1998 Number of farms, total 2552 2555 2560 2551 2553 2543 2523 2500 2523 Collective farms 1641 1779 1834 1824 1818 1811 1810 1785 1785 State farms 866 733 659 658 655 650 635 627 628 Inter-farm associations 45 43 39 30 29 28 26 18 18 52 70 92 Reorganized farms Percent of reorganized -- 28 39 51 54 -- -- 1.1 1.5 2.0 2.1 2.1 2.8 3.7 -- -- 28 11 12 3 -2 18 22 -- farms Year-to-year change in number of reorganized farms The decision to reorganize can be made by the workers' collective or by the farm management. If management decides to reorganize the farm, it has to secure the support of the general assembly of the member-workers, according to the standard collective-farm charter. No formal permission from the authorities is required to start the process of reorganization, but the :20 Chapter Two: new legal entity must be registered with the local government. For chronically unprofitable enterprises, the decision to reorganize may originate from the government. Existing laws and regulations do not provide uniform and well-defined procedures for farm reorganization. Hence, reorganization may or may not include distribution of property shares or changes in internal structure of the reorganized farm. An inadequate legal base is one of the major constraints for farm reorganization in Belarus. During the 1990's Belarus went through three stages of farm reorganization. The pattern of changes in the number of reorganized farms is shown in Table 2.3. More than half the farms classified as reorganized changed their organizational form during the first period of farm reorganization (1992-1994). The managers took advantage of the initial reform laws and changed the legal status of their enterprises to production cooperatives, joint stock companies, or other organizational forms. In transforming to a new legal entity, the managers avoided the prohibition against distribution of common property predicated by the standard collective-farm charter, and thus gained more freedom in decision making and allocation of property rights. The reorganized collective agricultural enterprises that emerged during this period were very similar in all respects to the traditional collective farms, but with one major exception - their new corporate charter allowed division of common property (i.e., non-land assets) among members. Most of these farms indeed distributed property shares to their members during reorganization. Moreover, there are indications that at least some of the first-period reorganized farms also distributed land shares to their members (although without physical allocation of land plots), a step which was apparently in violation of existing legislation. During the second period (1995-1996), the progress of farm reorganization was minimal. This slowdown in farm reorganization coincided with unfavorable changes in the economic policy environment described in Chapter 1. During the second period, the government tried to stimulate farm reorganization by administrative measures. Acknowledging the need for internal restructuring of farm enterprises, the Ministry of Agriculture pushed for the creation of separate production and marketing units in each enterprise. These new units, however, had limited independence from central farm management, and in some of the reorganized farms the number of new managerial positions increased to a point where the incremental administrative costs overweighed the potential positive effects of such internal restructuring. At about the same time, the Ministry of Agriculture created a special department to coordinate farm reorganization efforts. In 1996, after a series of visits of Belarusian agricultural officials to East Germany, the first national program of farm reorganization was formulated. A team of Belarusian and German experts drafted a law on adaptation of farm enterprises to market conditions that was based on the East German experience with farm reorganization.5 A pilot project was launched on three farms with German financing. At some point, however, the Ministry of Agriculture lost interest in farm reorganization: the department responsible for farm reorganization was liquidated, and the draft farm adaptation law was never finalized. It has been rewritten several times over the years, and is still under review at the Ministry of Agriculture. Belarusian agricultural policymakers remain convinced that large farm enterprises have a clear advantage over smaller farms due to economies of scale in agricultural production, contrary to the evidence of established international experience. a detailed discussion of the East German experience, see U. Koester and K. Brooks, Agriculture and German Reunification, World Bank Discussion Paper 355, The World Bank, Washington, DC, 1997. 5For Legal Framework for Land Reform and Farm Restructuring 21 In 1997, Belarus entered the third period of farm reorganization, which is characterized by even more active involvement of the government in the process. The recent efforts to jumpstart the stalled farm reorganization program are mainly attributable to the alarming decline in the performance indicators of agricultural producers. The number of unprofitable farm enterprises increased from none in 1990 to 369 in 1997 and 639 in 1998. Thus, fully 25% of farm enterprises reported losses in 1998, and if these unsatisfactory financial results continue, the losing farms will have to fall back on the government budget for periodic bailouts. The farms report losses despite a generous level of government support, which is provided to offset, at least partially, the implicit taxation associated with government policies of fixed-price procurement quotas. In 1998, the government provided a total of 41 trillion rubles (about $300 million - see Table 1.4) in support and investment to 2,523 collective and state farms. This works out at 16 billion rubles (or nearly $120,000) per farm enterprise, compared to average sales of 38 billion rubles ($280,000) per farm enterprise in 1998. Government support thus represents more than 40% of farm enterprise sales, which is a reflection of the burden that lack of profitability imposes on the budget. For reasons described in Chapter 1, the government does not have adequate financial resources to continue this level of support to unprofitable farms. For this reason the financial situation of a farm enterprise is currently considered by agricultural policymakers in Belarus as the major factor in determining whether that enterprise needs to be reorganized or not. By standard financial criteria used in market economies, the whole question of losses and profits in Belarusian farm enterprises is somewhat misplaced. In market economies, a farm is profitable if its production (valued at market prices) exceeds the cost of inputs (also valued at market prices). In Belarus, farm enterprises sell their products at government-prescribed fixed prices, which are substantially lower than market prices; on the other hand, they purchase their inputs at subsidized prices and receive other non-market forms of financial support from the government that partially offset the detrimental effect of fixed-price procurement arrangements. The true profitability is thickly masked by these non-market interventions: it is impossible to decide if farms report losses because of implicit net taxation, for which the government bears the blame, or because of poor management and cost inefficiencies, for which the farms are responsible. However, no data are available to disentangle the effect of the various components on farm profitability, and attempts to rank farm performance of necessity must rely on published profit and loss data, however deficient. Farm enterprises in Belarus are divided into three groups according to their financial situation. The first group (17% of all farm enterprises) consists of profitable farms, which are successful partly because of their resource base and partly because of better management. It is, of course, impossible to say how these farms would fare in a liberalized environment, with neither subsidies nor price controls. Yet government officials believe that the profitable farms should keep their present legal status, and that their efficiency can be improved by internal restructuring, creating separate production and marketing units within the farm. The second group (58% of the total) includes farms that are breaking even. According to Belarus experts, internal restructuring of these farms must be accompanied by more investment to improve their production technology. To strengthen the performance of breakeven farms, they may be merged with other profitable farms or undergo vertical integration with agribusiness companies. 22 Chapter Two: The third group includes loss-making farms. In 1998, 25% of all farm enterprises in Belarus reported losses. It is impossible to determine if these farms were unprofitable due to poor management or due to implicit net taxation by the government. Nevertheless, in accordance with Presidential Decree No. 97 "On Financial Support and Reorganization of Non-Profitable Agricultural Enterprises" (March 3, 1998), these farms may be subject to forced reorganization. The decree stipulates that "chronically" unprofitable farm enterprises may be reorganized into new legal entities if they fail to improve their performance after the government provides them with various additional forms of recovery-targeted support. Local authorities have already compiled a list of 249 "chronically" unprofitable farms. Their performance is supposed to be improved by two government initiatives: a three-year moratorium on the repayment of their obligations to the banks and the government, and a four-year exemption from land and property taxes. Any unprofitable farm that fails to improve its performance after these measures are implemented will be reorganized. Local departments of agriculture will monitor the performance of these farms, and they are authorized to decide on the need for reorganization. Merger with other profitable farms, input suppliers, or food processors is proposed by the government as the main method of reorganization. According to Presidential Decree No. 29 (January 15, 1999), industrial enterprises and farm input suppliers that decide to merge with unprofitable farm enterprises are allowed seven years to repay their debt. They are also granted tax privileges that are similar to those of unprofitable farms. The option of breaking up the unprofitable farms into smaller, more manageable units is not discussed. The new Civil Code that came into effect on July .1, 1999, recognizes three legal forms of business organization, which do not include the collective farm (the traditional kolkhoz) or the collective agricultural enterprise. The new legal forms are (a) limited-liability joint-stock companies (open or closed); (b) unlimited-liability partnerships; (c) cooperatives. The major characteristics of these organizational forms are described in Table 2.4. It is worth stressing that joint-stock companies are the only limited-liability organization recognized in Belarus; partnerships are always full-liability organizations. The definition of cooperative includes a curiously ambiguous requirement that members must work in the cooperative. If interpreted literally, this requirement makes all cooperatives pure production cooperatives or labor-managed firms. It eliminates the important group of service cooperatives, which provide services to a broad contingency of members but do not require that all members work in the cooperative. To allow the emergence of real service cooperatives, the definition should be modified to require patronage of the cooperative by members, rather than actual employment in the cooperative. Since collective farms and collective agricultural enterprises are not included among the organizational forms in the new Civil Code, all collective farms in Belarus in principle were required to change their legal form after July 1, 1999. The Ministry of Agriculture was put in charge of the reorganization program, which originally was supposed to be finished within one year, by July 1, 2000. Although it was not clear to what extent such reorganization would involve genuine restructuring of collective farms into viable business organizations, the opportunities to speed up the process of reforms were clearly there. In reality, however, the general reorganization program has not been implemented so far. The Ministry of Agriculture proposals for possible options of farm-enterprise restructuring have been rejected by the President, and the relevant section of the Civil Code has in effect been suspended. There has been no action on changing the legal form of the collective farms. Local experts are of the Legal Framework for Land Reform and Farm Restructuring 23 opinion that no organizational changes will be initiated in the collective farm sector until after the presidential elections in 2001. Table 2.4. Characterization of Different Organizational Forms According to 1999 Civil Code * Joint-Stock Company: A business entity created by two or more investors who acquire shares in the company by contributing cash or assets to its equity capital. By the principle of limited liability, the shareholders are liable for the obligations assumed by the joint-stock company up to the limit of their investment in the company's equity capital. The voting power is proportional to the number of shares held by the shareholder. The decision of a shareholder to leave the joint-stock company is not subject to approval of other shareholders. If the net assets of a joint-stock company fall below the level of its paid-up equity capital, the company must declare and register an appropriate write-off to its equity. If the company's net assets fall below a certain legal minimum (currently $7,000), the joint-stock company is liquidated. In a closed joint-stock company, shares are transferrable only among the existing shareholders. In an open joint-stock company, shares can be bought by outsiders. * Partnership: A business entity created by partners who contribute cash or assets to the equity capital. The partners bear full, unlimited liability for the obligations assumed by the partnership. The voting power is proportional to the investment of each partner. The mninimumstart-up capital for a partnership is the equivalent of $1,100. If the liabilities of the partnership are larger than its equity capital, no distribution of profits is allowed until the balance is restored. A partner who decides to leave the partnership gets the share of assets in kind or in cash. The transfer of assets from a member of the partnership to another person must be approved by all partners. Partnerships may not issue or publicly trade shares. Peasant farms in Belarus are considered a form of partnership. * Cooperative: A voluntary association of members (individuals or legal bodies) established for the pursuit of a common activity (production or services). Each member acquires a property share by making a contribution to the equity capital of the cooperative in cash or assets and is obliged to wvorkin the cooperative. The members are jointly responsible, in equal parts, for all the obligations assumed by the cooperative, which should be no less than yearly income of each member from the cooperative. This principle of members' unlimited liability may be modified by the cooperative charter, in which case each member's liability will be limited by the amount of annual revenue that the member receives from the cooperative (or a larger amount). The voting power is based on "one man, one vote" principle, and is not proportional to the invested capital. Profits are distributed among members according to participation. Decision of a member to leave a cooperative is not subject to the approval of other members. A member can be expelled from the cooperative for violation of the charter by a unanimous vote of the general assembly. On exit, members receive their property share in cash or in kind, as prescribed by the cooperative charter. The transfer of assets from a member of the cooperative to another person is subject to the approval of other members; members have a preferential right over outsiders to buy the property shares of exiting members. Cooperative shares are not issued for public trading, but outsiders may join the cooperative as new members by acquiring a share. 2.3 EMERGENCE OF PRIVATE FARMS All through the Soviet period, individual farming in Belarus, as in the rest of the USSR, was restricted to household plots operated by worker-members of collectives and other rural residents. The 1990 Land Code allowed for the first time the creation of independent individual farms outside collective farm enterprises. These new individual units are called private farms, or peasant farms, although they operate on state-owned land. The adjective "private" is typically used to distinguish this organizational form from collective farms and other corporate units (such as joint-stock companies and partnerships). The number of private farms in Belarus reached a peak of 3,000 in 1995 and has been decreasing since then, mainly due to liquidations and slow creation of new entities (Table 2.5). 24 Chapter Two: The average farm size, however, is increasing. As of the end of 1998, there were 2,600 private farms averaging 26 hectare each. Private farmers control in total 0.6% of agricultural land. Slow development of private farming may be attributed to the restrictive economic environment, which does not ensure equal operating conditions for collective farm enterprises and individual farms. In addition, the property rights of private farmers are poorly defined, contributing to considerable uncertainty in their operating decisions, while lack of credit facilities in the country makes it difficult to meet the high start-up costs. Table 2.5 Major Indicators of Private Farms Number of farms Total land, 1000 ha Average farm size, ha 1990 1991 1992 1993 1994 1995 1996 1997 1998 84 757 2372 2730 2954 3030 2977 2688 2600 1.9 15.6 45.6 55.8 60.7 62.3 61.4 60.7 67 22.6 20.6 19.2 20.4 20.5 20.6 20.6 22.8 26 Source: Statistical Yearbook of the Republic of Belarus 1998, Minsk, 1998; CIS Statistical Yearbook, Moscow, 1999. According to the Law on Private (Peasant) Farms adopted in 1991, private farmers do not own the land that they cultivate. Private farms are established on state-owned land received free of charge in lifetime inheritable possession through local government. The size of the free allotment is currently limited to 100 hectares (up from 50 hectares stipulated by the 1990 Land Code). The land allocated to a private farmer is non-transferable (other than through inheritance): it may not be sold, exchanged, subleased, mortgaged, or transferred to any other person. Farmers, however, may increase their holdings by leasing additional land from local authorities or from a farm enterprise. The government does not provide supportive conditions for the development of the private farming sector. To the contrary, it is beginning to impose administrative controls over private farmers, similar to its traditional control over farm enterprises. As of April 1, 1998, private farmers are required to sign contracts with local authorities in which they agree to specific conditions of land use, the structure of production, and the types and volumes of commodities to be produced and delivered to the state (Presidential Decree No. 193). The draft of the contract is prepared by the local authorities, and the private farmer has 10 days to review and sign it. The presidential decree does not specify a mechanism for resolution of disputes between private farmers and local authorities about the terms of this contract. The new decree essentially deprives the private farmers of independence in their operating decisions and subjects them to a rigid system of state purchase orders. As any other legal entity in Belarus, private farmers need a permission of the authorities to ship their products out of the local region (raion or oblast), even if they are ultimately intended for domestic sale. Unlike the large farm enterprises, private farmers receive very limited financial support from the government. In the past, independent farmers were entitled to subsidized credits at half the interest rate charged by the Central Bank. Yet the total amount of such subsidized credits available to all private farmers in Belarus was 16.8 billion rubles in 1998, which is roughly equal to the government support for one farm enterprise in 1998 (16 billion rubles, as noted previously). In 1999, the state budget made no provision for subsidized credits to private farmers. Legal Framework for Land Reform and Farm Restructuring 25 The official position of the government is that all forms of ownership in agriculture have equal rights and obligations. To prove this assertion, the government is building six "model" private farms, one in each oblast, with a total public investment of 50 billion rubles in construction and capital equipment. A recent presidential decree has made an important step toward reallocation of production assets between farm enterprises and private farmers (Presidential Decree No. 95 "On Measures of Development of Peasant Farms and Their Government Support", March 3, 1998). Managers of farm enterprises are now allowed to lease out underutilized assets and equipment to private farmers on long-term contracts. This new decree may ease the difficulties with high start-up costs for new farmers. 3. Outcomes of Farm Sector Reorganization: Evidence from the Field The following sections (Chapters 3-7) present the findings of a farm survey that was conducted in Belarus in September-October 1999. The survey was designed to elicit the outcomes of the farm restructuring process that has been going at a slow but fairly steady rate since 1990-1992. The objectives of the survey included examination of a variety of reformrelated topics with relevance for agriculture - land use, internal restructuring of farm enterprises, changes in production patterns, development of market services for farms, growth of the individual farming sector (including households in farm enterprises and independent private farms), financial performance of farms, impact of reforms on life in rural households. Unlike recent World Bank studies in Ukraine and Kazakhstan that focused specifically on reorganization of large farm enterprises, the present study takes a much broader view of the process of reorganization. It examines the restructuring of the entire farm sector in Belarus, covering its three main components: large farm enterprises, household plots cultivated by farm employees, and independent private farms. Performance comparisons are made for the major commercially oriented units: collective and corporate farms, on the one hand, and individual farms on the other. The impacts of reorganization on rural households and the changing role of household production are assessed. In line with the general objectives, the survey included a sample of farm enterprises as representatives of collective and corporate forms in agriculture and a sample of private farmers as representatives of the new emergent forms in the individual sector positioned outside the collective framework. The individual sector was additionally represented by a sample of households from farm enterprises, which account for a large share of agricultural production and are the backbone of rural life. In an attempt to detect possible reorganization-related changes, the sample of farm enterprises was divided into two sub-samples, a sub-sample of farms that have undergone some form of reorganization during the 1990's ("reorganized farms") and a control sub-sample of "non-reorganized farms." The results for these two sub-samples are reported separately throughout the following chapters, even when there are no substantial differences between reorganized and non-reorganized farms. This approach should enable the reader to form independent conclusions regarding the impacts of reorganization. 3.1. SAMPLE DESIGN The sample design is shown in Table 3.1. Reorganized farms were selected from among the national population of 92 farms that changed their legal status during the 1990s. The adjective "reorganized" has a very limited, purely formal connotation: a reorganized farm is merely a farm enterprise that changed its registered legal status at some time after 1990; it does 27 28 Chapter Three: not necessarily imply any changes in internal organization of operations, and the survey was actually designed to elucidate to what extent formal reorganization has been reflected in internal changes on the farm. The reorganized farms were selected for the survey by the Belarus Institute of Agricultural Economics in cooperation with the Ministry of Food and Agriculture. A total of 48 reorganized farms were included in the sample, corresponding to over 50% of all reorganized farms in the six oblasts of Belarus. The 33 non-reorganized farms were selected by the Institute at random from the remaining 2,500 farm enterprises, at a rate of 4-7 farms in each of the six oblasts. The private farmers were also sampled at random in each of the six oblasts (4-7 farmers per oblast for a total of 30 respondents). For the sample of rural households, approximately 10 employee households per farm were randomly selected in most farm enterprises participating in the survey. This gave 744 additional interviews with individual respondents representing households in reorganized and non-reorganized farms. The interview in each farm enterprise was conducted with the manager; the chief economist and the accountant were called upon to provide supplementary quantitative information when necessary. In private farms, the interviews were conducted with the head of the farm, i.e., the private farmer himself (or herself, as the case may be). In employee households, the head of the household or the spouse was interviewed. A profile of rural households as represented by private farmers and farm-enterprise employees is given in a box. Table 3.1. Sample Design: Number of Respondents by Oblast and Type Managers Private Employee households Oblast Reorganized farms Nonreorganized farms farmers Reorganized farms Nonreorganized farms Total households Minsk 12 4 6 121 40 161 Brest 11 8 4 106 100 206 Vitebsk 8 5 4 80 50 130 Gomel 4 7 4 40 70 110 Grodno 10 3 5 70 10 80 Mogilev 3 6 7 22 35 57 Total 48 33 30 439 305 744 A group of 35 agricultural policymakers representing officials active in the development or implementation of agricultural policies at the regional and national level were also interviewed. Comparison of policymakers' responses with those of managers and private farmers was sometimes helpful in explaining the current status and prospects of agricultural reforms. Outcomes of Farm Sector Reorganization: Evidence from the Field 29 Profile of Rural Households: Independent Farmers and Farm-Enterprise Employees Privatefarmersand farm-enterpriseemployeeshave familiesof the same size: the medianfamily size is 4 for households in each category. Yet there are two significant differences between the two groups of rural residents: age andeducation. Farmers' households are generally younger: the farmer is 41 years old and the spouse is 38, compared Fig. 3.A. Education Level: Farmers and Employees with 45 for the husbandand43 for the spousein farmemployeehouseholds.The average age of all family members is 30 for farmers' families and 34 for families of farm-enterprise employees. All age differencesare significant. higher Educational attainment is higher for independent farmers: 60% report higher education, compared with only 25% among farm-enterprise employees (see technical college Figure 3.A). At the other extreme, 5% of heads of households among farm-enterpriseemployees have general secondary had less than 10 years of schooling, while practically lh _ farmers lopmplow-as y all private farmers have at least completedsecondary lessthan 10 years education. A similar differential in educational attainment is observed among the women in these households: 36% of farmers' spouses report higher educationcomparedwith26% for spousesof farm-enterprise employees. 1 2 30 5D 60 7 nercentof resnondents Rural familiestend to live in detachedhouses rather than apartments.This is particularlypronouncedamong farm-enterpriseemployees,where65% of respondentslive in a house comparedwith 53% for farmers(Table3A). The privatefarmersmay not havehad enoughtime to build a house of their own so soonafter the establishmentof their independentfarm, and indeed50%of farmersreportthat theyare planningto build a new house in the next2-3 years (comparedto less than 10% amongfarm-enterpriseemployees).Whethera detachedhouse or an apartment, the housingis generallyownedby the family:over 70% of householdsin each categoryreport that their home is family-owned(Table 3.A). The role of the farm enterprisein provision of housing is marginal: only 17% of employeeslive in enterprise-ownedhousing.Independentfarmershave no accessto enterprise-ownedhousing,and instead they use state-ownedhousingor rent from private individuals.All householdshave electricity,most have runningwater,andabout half the householdsare connectedto the sewagesystem(Table3.A). Gas is reportedmuch morefrequentlyby employeehouseholds,as it is generallysuppliedby the farmenterprise.Telephones,on the other *hand,are more commonamongindependentfarmers,whoprobablyneedthem as a standardbusinesstool. Table3.A.RuralHousing Farmers Employees 53 House Apartment 40 Rentalfromprivateindividuals 7 Employees 93 77 77 100 64 95 65 33 2 Electricity Runningwater Gas Telephone 93 63 78 17 3 2 Centralheating Sewerage 40 57 18 44 By ownership: 73 Family-owned housing 3 Enterprise-owned housing 17 State-owned housing Rentedfromprivateindividuals 7 Farmers Amenities: By type ofhousing: In farmers' families,the head of the household- the farmerhimself- usuallyworks full time on the family farm, while 50% of the spousesdevoteonly part of their time to the farm. The farmer's spouseadditionallyholds a salariedoff-farmjob in the local farm enterpriseor in social servicesin the village.This diversificationof income sourcesprovidesan importantcomponentof insuranceagainstrisk in the uncertainbusinessof independentfarming. In employeehouseholds,on the other hand,both husbandandwife typicallyhold salariedjobs in the farmenterprise or in the village,and thereforework onlypart time on their"familyfarm"- the householdplot. 30 Chapter Three: 3.2. REORGANIZATION OF LARGE FARM ENTERPRISES Despite the changes in the balance of agricultural output between socialized and individual farms during the last decade (see Figure 1.3), large farm enterprises - the traditional collective and state farms - remain a major source of commercial production in the country. Their reorganization is expected to make a significant contribution to improvements in efficiency and productivity of the farm sector. Unfortunately, the empirical findings from the survey presented in this section show that very little has changed in the large farm enterprises and that their performance generally has not improved. Changes in Organizational Form of Farm Enterprises Collective farms (kolkhozes) represent about 70% of farm enterprises in Belarus and state farms account for the remaining 30% (see Table 2.3). The national structure of the farm sector has remained relatively unchanged all through the 1990s, and it is closely replicated in the sample of non-reorganized farms in the survey (Table 3.2). Among the reorganized farms, on the other hand, nearly 90% were collectives prior to reorganization. It is therefore the collective farms that reorganized more readily than state farms during the last decade. This may be due to greater flexibility of decision-making associated with the member-dominated governance in collective farms, while state farms have to depend in these matters on the more rigid government bureaucracy. Table3.2. Distributionof Farms by OrganizationalFormBefore and AfterReorganization(percentof farms in each category) 1990 Traditional organizational form 1998 Non-reorganized Reorganized farms (n=33) farms (n=48) New organizational form after reorganization Reorganized farms (n=48) Collective farms 67 88 Collective agricultural enterprises 38 State farms 27 4 Agricultural cooperatives 19 Inter-farm enterprises 0 2 Joint-stock companies 13 Agrofirms 3 2 Partnerships 4 Other 3 4 Agrofirms 10 Other forms 13 Didnotchangetheirstatus 4 Total 100 100 Total 100 By 1998, nearly 40% of the reorganized farms in the survey had re-registered as collective agricultural enterprises (Table 3.2). The change of legal status from collective farm to collective agricultural enterprise (a legal form recognized by the old Civil Code prior to 1999) does not sound like a major feat of restructuring. In fact, it sounds literally as a case of "changing the sign of the door," performed to comply with some new legal requirements of corporate legislation. Yet even this limited form of reorganization is an essential first step for further restructuring, because it involves a change of corporate charter. The standard charter of a collective farm used since the Soviet times did not allow division of jointly owned assets, and 31 Outcomes of Farm Sector Reorganization: Evidence from the Field this restriction could be overcome in the charter of the new entity, even if it were registered as a collective agricultural enterprise. Other popular forms among reorganized farms are agricultural cooperatives (19%) and joint-stock companies (13%). Partnerships are not particularly popular, probably because they impose an unlimited form of liability (see Chapter 2). The Essence of Reorganization: Allocation of Property Shares Collective farms were theoretically governed by the general assembly of their members. Now that the former collective farms are changing into various shareholder structures, they are governed by the body of shareholders or founders. In most CIS countries, shareholders in a former collective hold two types of shares: a land share and a property share. A land share represents fractional entitlement to the agricultural land privatized by the state to the farm enterprise; a property share is a share in non-land assets accumulated by the farm enterprise in the past. In Belarus, agricultural land is not privatized by the state to the farm enterprises: it remains in state ownership. Individuals therefore receive only property shares. By leaving the property shares in the use of the farm enterprise, the individual becomes a shareholder or founder of the new organizational form (a joint-stock company, a cooperative, a partnership, etc.). Alternatively, the individual may exit the farm enterprise withdrawing the share of property (in kind or in cash) to establish an independent private farm outside the collectivist framework on land assigned by the state. The farm assets were divided into property shares in 75% of the reorganized farms. This is corroborated by the employees of reorganized farms, 70% of which report that property shares have been determined in their farm enterprise. Property shares were distributed to all workers and pensioners of the farm enterprise: the average number of property shares (806) is practically equal to the average number of adults associated with the farm enterprise (817 active workers and pensioners). However, the new shareowners physically hold an official ownership document in less than 15% of the farms that have determined property shares. In two-thirds of the farms, the ownership documents are "kept in the office," which probably means that the property shares are merely recorded in the books of the farm enterprise instead of being actually issued and distributed in the form of certificates of entitlement. In the remaining 15% of the farms, the shareowners do not have any documents certifying their right to a property share. Table3.3. Distributionof the Numberof FoundingMembersand AverageFarmSize Percentage of farms Average farm size, ha Average number of workers Average number of founders 101 -500 35 2,322 174 311 501-1,000 29 3,254 320 649 1,001-1,500 24 5,556 708 1,211 Over 1,500 12 7,780 1,072 1,829 4,000 448 801 Number of founders Total 100 Note: For n=34 farms that distributed shares and report the number of founders. 32 Chapter Three: After property shares are allocated, the new shareowners - the members of the former collective farm - may decide to become founding members of the new legal entity. The average number of founding members per farm (800) is practically equal to the number of shareowners. This clearly implies that all shareowners keep their property shares in the original farm enterprise, and no property is withdrawn from the reorganized farm enterprises for the establishment of individual farms. The number of founding members in reorganized farms ranges from 100 to 2,000, with 50% of farms reporting more than 600 founders and 12% more than 1,500 founders. There is a significant positive correlation between the size of the farm the number of founders. A higher number of founders implies a larger farm with more land and more workers. The number of active workers on average runs at about 60% of the number of founders: the rest are pensioners (Table 3.3). The mutual rights and obligations of the shareholders and the farm enterprise are t:ypically determined by the corporate charter (85% of managers in reorganized farms). The frequency of occurrence of various rights associated with property shares is given in Table 3.4, which presents the views of both managers and employees in reorganized farm enterprises. The ranking of the frequency scores for the various options is the same for both groups of respondents, and even the percentage values are very close in the two samples. This clearly points to consistency of the information regarding rights available to managers and employees. Table 3.4. Rights Associated with Property Shares as Reported by Managers and Employees of Reorganized Farms Managers Employees (n=36) (n=308) Right to receive dividends 83 75 Cash dividends only 47 50 Dividends in kind only Dividends in cash and in kind 6 0 31 25 Right to agreed lease payments (in cash or in kind) 0 2 Right to sell property share to farm enterprise 44 23 Right to sell property share to other shareholders in farm enterprise 19 10 Right to sell property share to anybody 6 0 Right to get value of property share in cash on exit 50 35 Right to get value of property share in cash when dismissed from work 33 36 Right to get share value in physical equipment when leaving to start a private farm 42 38 Right to get share value in physical equipment when leaving for other reasons 14 8 Right to bequeath to a heir who works in farm enterprise 47 47 Right to bequeath to any heir 31 18 In general, property shares seem to be regarded as a permanent equity investment in the farm enterprise. The most common right associated with property shares is to receive dividends (in cash or in kind). This right is reported by 83% of managers and 75% of employees in reorganized farms with property shares (Table 3.4). The option to lease property shares to the enterprise for a fixed term in return for an agreed rent is not considered at all. Outcomes of Farm Sector Reorganization: Evidence from the Field 33 The transferability of property shares is very limited at this stage. About 44% of reorganized farms allow sale of property shares to the farm enterprise, 19% allow sale to other shareholders, and only 6% allow sale of shares to outsiders (Table 3.4). Liquidity and convertibility of property shares are also limited. About half the enterprises will redeem the property share in cash when the shareholder leaves the farm enterprise, and one-third will pay the cash value of the property share when the shareholder is fired from his job on the farm. The right to get equipment and assets in physical form against the property share is virtually limited to individuals who leave the enterprise to establish a private farm. This right is reported in only 42% of reorganized farm enterprises, which in a way contradicts the existing legislation that guarantees redemption of property shares into physical assets for new private farmers. The restrictions on transferability and convertibility may prove an impediment to reallocation of assets to more efficient users and restrict rural mobility. The new shareholders are very conservative in their plans for future use of property shares. More than half the employees who have received property shares plan to leave their new found capital in the existing farm enterprise, for continued joint use (Table 3.5) . Only 10% plan to shift their property shares to a new legal entity, probably following their manager's recent announcement of intentions to reorganize their farm enterprise into a different organizational form. Plans for other uses of property shares (establish a private farm, lease to outsiders, sell) are minimal. The priorities reported by employees who have not received property shares (i.e., employees in non-reorganized enterprises) are basically the same, although three-quarters of them naturally do not know what they will do with the hypothetical property shares when and if they get them in the future. The percentage of "don't knows" among the employees who have received shares is substantially lower, but still quite high (25%). This may indicate that rural residents do not attach much importance to the whole phenomenon of property shares on the family level. Table3.5. WhatShareholdersare Planningto Do withTheirPropertyShares(percentof respondentsin each category) Respondents who received property shares (43%) Respondents who did not receive property shares (47%) Entire sample (including 10% "don't knows") Leave in farm enterprise for dividends 54 12 30 Invest in share capital of new entity 10 8 8 Use to establish private farm 1 1 1 Sell or lease out 2 2 2 Bequeath Don't know 8 1 4 25 76 55 Total 100 100 100 Minimal Changes in Internal Organization Formal reorganization involving registration as a new legal entity with a new corporate charter and allocation of property shares to the members is typically expected to be the first step in a more meaningful internal restructuring aiming to improve productivity and efficiency. The 34 Chapter Three: Belarusian farms have not advanced beyond the first step of formal reorganization. Farms generally reorganize "one-to-one," without splitting into several independent entities of more manageable size. Only four of the 48 reorganized farms divided into two components, and one split into 36 parts. Such transformation usually involves the creation of several production or service units within the parent farm, which enjoy a limited degree of autonomy but by no means can be regarded as new independent entities. Separation of smaller private farms from the large farm enterprise is reported only in five out of 48 cases, which in total produced 21 private farms that now operate outside the reorganized farm enterprises. Practically all reorganized farms retain a strong central management, which absolutely controls production, labor management, purchase of inputs, and sale of farm products (Table 3.6). Only 16% of farms (mostly reorganized) provided detailed information on the formation of internal functional subdivisions, which could act as a core for new independent entities. Yet the subdivisions have limited autonomy, mainly in production planning and management. Very few of the subdivisions have their own bank account and none have direct access to credit (Table 3.7). The subdivisions have to rely completely on central management for all financial transactions, as well as largely for other day-by-day routine business operations. Table3.6. Functionsof CentralManagementin ReorganizedFarms and Areas of Autonomyof Subdivisions (percentof managersidentifyingeach specificarea) Functionsof centralmanagement Percentof farmsenterprises Production planning and subdivision control 88 ILabormanagement,includinghiringand firing 75 Purchase of farm inputs for subdivisions Sales of farm products 75 Provision of expert services to subdivisions Provision of administrative services Relations with banks and financial institutions 56 75 50 48 Table3.7. Areasof OperationalAutonomyof FunctionalSubdivisions Areas of autonomy of subdivisions Percent of all farms (n=81) Percent of farms with subdivisions (n=13) Production planning 23 69 Purchase of farm inputs 4 8 Sale of farm products 5 31 Own bank account 2 15 Access to credit 0 0 Own administrative staff 6 31 Labor management 7 31 In view of their extremely limited independence, it is not surprising that 80% of the subdivisions are not registered as legal entities. The functional subdivisions are merely internal organizational units of the parent farm, like the traditional links and brigades in collective farms. Outcomes of Farm Sector Reorganization: Evidence from the Field 35 The subdivisions continue to be managed centrally, without scope for independent initiative and accountability. Lack of Farm Size Adjustment The traditional collective and state farms are typically much bigger - by the amount of land, by the number of workers, and by the capital stock endowment - than farms in market economies. Western experts therefore argue that downsizing of the large farm enterprises is a necessary component of the transition to market. The farms in Belarus so far do not show any size adjustments during the reorganization process. This is clear from Table 3.8 in which the size of the average reorganized farm remained static between 1995 and 1998 at 3,800-3,900 hectares of agricultural land and about 450 workers. The non-reorganized farms participating in the survey similarly did not change their size between 1995 and 1998. The slight increases in land endowment and decreases in labor force in both farm categories during the period were not statistically significant. The previous discussion has shown that the formal reorganization procedures have failed to induce internal restructuring of farm enterprises. The data in Table 3.8 now provide quantitative evidence that these formal reorganization procedures have left the reorganized farms basically unchanged, like the non-reorganized farms, as if no reorganization had been attempted. Table 3.8. Land and Labor in Reorganized and Non-Reorganized Farms: 1995-1998 (per-farm averages) Reorganized (n=48) Non-reorganized (n=33) 1995 1998 1995 1998 Agricultural land (ha) 3827 3931 3040 3094 Total number of employed 458 437 291 274 Workers per 100 ha 11 10 10 Note: Differences between 1995 and 1998 are not statistically significant within each group of farms. 9 Observed Differences Attributable to Starting Conditions While neither reorganized nor non-reorganized farms showed any significant changes in land and labor between 1995 and 1998 - as a result of reorganization or due to other factors, the reorganized farms on average were substantially larger than the non-reorganized farms by all physical measures in both years. Already Table 3.8 shows that the reorganized farms had more land and employed more workers in both 1995 and 1998. They also had more assets in both years, and because of their larger size they generated more sales and earned higher absolute profits than the non-reorganized farms in both years (Table 3.9; the differences in all these characteristics between reorganized and non-reorganized farms are statistically significant for each of the two years). The higher level of absolute profits in reorganized farms translates into higher profitability (as measured by profit margins), again both in 1995 and 1998. The higher profitability in part may be due to the higher proportion of non-agricultural activities (including processing) in the product mix of reorganized farms in both years (Table 3.9). Responses to a 36 Chapter Three: separate set of questions reproduced in the last line of Table 3.9 show that 44% of reorganized farms report some processing or non-agricultural activities, double the corresponding percentage among non-reorganized farms. Since there are no significant differences in the share of crop or livestock products in farm sales, the structure of sales in the farms surveyed seems to corroborate the common claim that value-added processing activities make an important positive contribution to profit. Non-agricultural activities are less subject to government price controls and are therefore generally thought to be more profitable than primary agriculture. Moreover, non-agricultural activities bypass the traditional state-controlled marketing and finance channels and can generate ready cash for working capital and investment in agriculture, thus also contributing to higher profits. Table 3.9. Land, Labor, and Product Mix in Reorganized and Non-Reorganized Farms: 1995-1998 (per-farm averages) 1995 Reorganized (n=48) 1998 Non-reorganized Reorganized (n=33) (n=48) Non-reorganized (n=33) Agricultural land (ha) 3827 3040 3931 3094 Labor (total number of employed) 458 291 437 274 Fixed assets (billion current rubles) 30 18 152 77 Sales (billion current rubles) 13 7 107 36 Profit (billion current rubles) 3 1 17 4 Profit margin (% of sales) 21 13 16 7 Share of crop products (% of sales) 28 28 33 37 Share of livestock (% of sales) 50 57 48 53 Share of non-agricultural activities (% of sales) 22 14 19 11 Farms with non-agricultural activities (% of respondents) NA NA 44 21 Note: All differences between reorganized and non-reorganized farms (except the differences in the share of crops and livestock) are statistically significant for each of the two years. The differences in profit margin could not be tested for significance, because it was calculated as the weighted average for each of the two groups. Larger size, greater sales and absolute profits, as well as higher profitability and higher share of non-agricultural activities distinguish reorganized farms from their non-reorganized counterparts. Yet all these features were observed in the reorganized farms already in 1995, and they simply persisted through 1998. The major differences between reorganized and non-, reorganized farms in Tables 3.8 and 3.9 appear to be the result of different starting conditions in 1995, and not the result of reorganization that has evolved dynamically over time. Larger anid more profitable farms may have been more willing to reorganize from the start, just as collectives show a greater readiness to reorganize than state farms. Reorganization Driven by Reform-Minded, Experienced Managers The possibility of self-selection among reorganized farms noted at the end of the previous subsection may be linked to the characteristics of the managers in these farm enterprises. The Outcomes of Farm Sector Reorganization: Evidence from the Field managers in reorganized and non-reorganized farms 37 differ sharply by some important characteristics (Table 3.10). Managers of reorganized farms appear to be more reform-minded than managers of non-reorganized farms. Thus, the percentage of respondents who support permission to buy and sell privately owned land (i.e., land in household plots) is significantly higher among reorganized-farm managers. Managers of reorganized farms are also older and more experienced: they have been longer on the job, and are thus able to capitalize on their accumulated wisdom for the benefit of their farm. Managers of non-reorganized farms on average have held their position for half the number of years reported by managers of reorganized farms. This is probably a reflection of a high rate of managerial turnover precipitated by the dissatisfaction of the local authorities with low profits in non-reorganized farms. We are apparently facing a kind of a vicious circle here: good, experienced managers are important for the success of their farms, but it is the managers of successful farms that are allowed to stay longer on the job for the benefit of the enterprise and the rural community; inexperienced managers cannot turn around unsuccessful farms, but if the farm is unsuccessful, the manager will be quickly fired by the authorities before he has had a chance to gain any experience. Table 3.10. Manager's characteristics: 1998 Reorganized Non-reorganized Age, years 48 43 Years in present position I1 6 Supports buying and selling of privately owned land (% of respondents) 44 24 Note: All differences between reorganized and non-reorganized farms statistically significant at 10%. The apparent dependence on initial conditions noted in the preceding subsection may be explained by differences in managers' incentives. It is the managers of best-endowed and bestperforming farms that have the highest incentives to push for reorganization by convincing and lobbying the collective and the agricultural authorities. Thus, it is the best farms that are most likely to reorganize in the first place, and they simply continue to maintain their starting advantage relative to the initially less profitable farms, where managers had no incentive to put the necessary effort into reorganization. Evaluation of Farm Restructuring Outcomes by Managers and Workers The results presented so far generally point to absence of significant changes and meaningful restructuring in the reorganized farm enterprises. We now shift to subjective opinionbased findings that show how farm managers and farm employees perceive and evaluate the changes occurring on their farms in the process of reorganization. The changes were analyzed in several dimensions: workers' behavior on the job, business objectives, farm operations, and the economic environment. The results are more encouraging than what could be expected on the basis of the previous quantitative comparisons: both farm managers and farm employees give a better subjective score card to reorganized farms than to the non-reorganized counterparts. Chapter Three: -38 Perceived Changes in Workers' Behavior Reorganization appears to have had a relatively beneficial effect on workers' behavior as measured by discipline, motivation, and the level of general satisfaction. Thus, about 60% of managers and employees in reorganized farms indicate that the workers' behavior has improved or remained unchanged; the corresponding percentage in non-reorganized farms is lower, generally about 50% (Table 3.11). Negative changes in workers' behavior are reported by managers and employees of non-reorganized farms with much higher frequency than in reorganized farms (40% for non-reorganized farrmscompared with about 20% for reorganized farms). Table 3.11. Changes in Workers' Behavior During the Last Five Years as Reported by Farm Managers and Employees Reportedby Workers' discipline Workers' motivation Level of workers' general satisfaction Reorganized Non-reorganized Higher No change Lower Higher No change Lower Managers 31 40 23 24 24 48 Employees 29 39 22 13 38 33 Managers 33 27 27 27 30 42 Employees 27 41 13 16 40 21 Managers 17 38 29 12 21 58 23 18 31 40 27 37 Average frequency score Note: Number of respondents: 48 managers, 439 employees on reorganized farms; 33 managers,305 employees on non-reorganized farms. The participation rate of workers in managerial decisions has increased for both types of farm enterprises, but it was and remains lower in non-reorganized farms (Figure 3.1). This is yet another indication that the pattern of differences between reorganized and non-reorganized farms is not necessarily a result of a dynamic process of change, but probably a reflection of Fi differences in pre-reorganization conditions. The participation rate at g 3.1 Participation Rate of Farm Workers in the time of the survey was about Management Decisions: Five Years Ago and Today 35% for reorganized farms and percentparticipatinginmanagementdecisions 40 20% for non-reorganized farms. The initial expectations vigorous participation 2EIK;5 of active, of workers in the decision-making process after reorganization obviously did not materialize. The fact that about two-thirds of shareholder-workers do not participate in managerial decisions points to lack of true and democratic governance retention of the traditional managtion of theme styleitional autocratic management style after reorganization. 30 ___ L1 1995] 20- 0;E1999 10_ 0 0 Reorganized farms Non-reorganized farms farms. of respondents:444 in reorganized,333 in non-reorganized Number Outcomes of Farm Sector Reorganization: Evidence from the Field 39 Changes in the Perception of Producer Objectives Transition from plan to market is naturally expected to shift the producer objectives from typical attributes of a command economy (fulfillment of production targets and output maximization regardless of costs and consumer demands) to market-oriented attributes (cost minimization and profit maximization) The objectives perceived by both farm managers and farm employees show a clear shift in this direction (Table 3.12). Table 3.12. Changes in Objectives of the Farm Enterprise as Perceived by Farm Mangers and Farm Employees (percent of respondents) A. Managers Objective Reorganized farms (n=48) Non-reorganized farms (n=33) Before reforms At present Before reforms Present time Achieving production targets 38 23 67 36 Output maximization 38 29 18 36 Full employment 10 6 6 3 Cost minimization 13 13 9 12 Profit maximization 42 63 30 55 Food security for population 17 17 6 9 B. Employees Rcorganized farms (n=448) Non-reorganized farms (n=295) Before reforms At present Before reforms Present time Achieving production targets 42 15 46 33 Output maximization 9 14 10 11 Full employment 2 1 2 1 Cost minimization 0 1 2 2 Profit maximization 28 46 33 36 Food security for population 19 23 14 14 Respondents in all four categories (managers of reorganized and non-reorganized farms, employees in reorganized and non-reorganized farms) clearly reveal that the importance of production targets as an objective declined during the decade of transition, while the importance of profit maximization increased. We can say with some degree of certainty that the on-going discussion of the issues of transition has had a definite educational effect on the rural population: everybody on the farm level now knows that production targets are "out" and profit maximization is "in." The results obtained for output maximization (as a command-economy objective) and cost minimization (as a market objective) are mixed, however, probably because of semantic misunderstandings associated with an unclear formulation of the questions. It is interesting to note the fairly persistent attitude toward social objectives (maintaining full employment and ensuring food security): they were not regarded as very important before reforms, nor are they regarded as very important today. Managers of reorganized farms expect reorganization to have a generally positive impact on future development of their farms (Table 3.13). Managers of non-reorganized farms are much 40 Chapter Three: less optimistic in their expectations: they mostly anticipate no change or negative results. These views may explain why they still manage non-reorganized farm enterprises and do not expect to launch any reorganization initiatives. Among policymakers, almost half are of the opinion that reorganization will have no impact on the performance of farm enterprises (they try to remain bureaucratically impartial and do not predict outright negative results). However, neither policymakers nor managers of non-reorganized farms are active players in the process of reorganization. We should probably attach more weight to the views of the managers of reorganized farms, as they have actual experience "doing it" and know best what reorganization involves. Table 3.13. Expected Impact of Reorganization on Future Development of the Farm Enterprise (percent of respondents) Managers Policymakers (n=35) Reorganized farms (n=48) Non-reorganized farms (n=33) Positive 46 14 29 No change 33 32 49 Negative 0 18 3 Undecided 21 36 20 Changes in Farm Operations Managers of reorganized and non-reorganized farms present totally different views of the changes in farm output during the last five years. For non-reorganized farms, managers predominantly report declines in output. For reorganized farms, most managers report increases in output or no change for the worse during the last five years (Table 3.14). These subjective responses are consistent with the quantitative analysis of farm financial data in Chapter 5, which indeed shows an increase in sales for reorganized farms and a decrease in sales for nonreorganized farms (see Table 5.7). The labor force is universally reported to have decreased for both reorganized and non-reorganized farms, although as we have seen in Table 3.5, the decrease in the number of workers was statistically not significant (about 5%). Employees generally indicate that the level of wages has decreased (60% of respondents in all farms), which may have contributed to the outflow of labor from agriculture to other more attractive occupations. Changes in labor and output of course have an implication on the productivity of labor. The analysis in Chapter 4 shows that the productivity of labor increased in both reorganized and non-reorganized farms between 1995 and 1998 despite the different trends in farm output (see Table 4.8). Another operational feature concerns the frequency of barter transactions and in-kind payments to labor. The picture here is not entirely clear, as the opinions of the managers in all farms are split roughly down the middle. About 50% of the managers in both reorganized and non-reorganized farms indicate that the reliance on barter transactions today is higher than five years previously (Table 3.14). Yet the other 50% hold a different opinion. In non-reorganized farms, for instance, almost 40% of managers report that the reliance on barter transactions has decreased. The reports on payment of wages in kind are similarly inconclusive. Only 40% of managers express the view that the frequency of in-kind payments to labor has increased. Again in non-reorganized farms, over 40% of managers hold the opposite view that the frequency of in- Outcomes of Farm Sector Reorganization: Evidence from the Field 41 kind wages has declined. Among farm employees, less than 15% of respondents indicate that payment of wages in kind has increased. These (admittedly highly subjective) views paint a picture which is inconsistent with reports of sweeping "barterization" and "demonetization" of the economy often presented in the literature without quantitative substantiation. Table3.14. Perception of Operational Changesin Reorganized andNon-Reorganized FarmsasReportedby ManagersandEmployees Reportedby Output Numberof employed Wages Bartertransactions Paymentof wagesin kind Managers Managers Employees Managers Managers Employees Reorganizedfarms Higher No change Lower 40 19 38 6 15 79 18 7 57 52 29 8 40 40 15 14 48 22 Non-reorganized farms Higher No change Lower 18 12 70 3 6 88 18 8 60 46 18 36 39 18 42 9 45 28 Note: Numberof respondents:48 managers,439 employeeson reorganizedfarms;33 managers,305 employeeson non-reorganizedfarms. Perceived Changes in the Economic Environment Managers of all farm enterprises tend to view the business environment today as less supportive than it was five years ago. Opportunities for buying inputs, obtaining credit, and marketing products are characterized as worse than five years ago by 40%-70% of managers in both reorganized and non-reorganized farms (Table 3.15). Practically everybody complains about the higher burden of taxation. Overall, the responses of the managers of reorganized farms are slightly more optimistic than these of the managers of non-reorganized farms: averaging the managers' responses over all five environmental dimensions in Table 3.15 (without weighting), we conclude that the situation today is described as better or not worse than five years ago by 37% of managers of reorganized farms and 29% of managers of non-reorganized farms. Table3.15.MajorChangesin EconomicEnvironmentDuringthe LastFive Yearsas Reportedby Managers (percentof respondentsin each sample) Reorganizedfarms(n=48) Non-reorganized farms(n=33) Better No change Worse Better No change Worse Opportunitiesto buy agriculturalinputs 17 8 73 12 9 79 Opportunitiesto obtainloans 10 25 58 9 18 70 Marketingopportunities 10 48 42 15 27 58 Freedomin decisionmaking 13 48 31 24 24 45 Taxes 0 8 90 3 3 94 Averagefrequencyscore 10 27 59 13 16 69 Despite the ongoing reforms and reorganization, managers generally complain that their freedom of decision making has become more restricted or at best has not changed compared to five years ago. About 80% of managers of reorganized farms and 70% of managers of non- Chapter Three: 42 reorganized farms do not see any improvement in their freedom of decision making. These findings are consistent with the slow pace and superficiality of the economic reforms in Belarus. Paradoxically, it is the managers of reorganized farms that give a poorer evaluation of their economic freedom. Their unfavorable evaluation may be the result of disappointment, because their initially high expectations about new freedom associated with reorganization and reform have failed to materialize. Do Reorganized Farms Perform Better? The composite portrait of a typical reorganized farm in Belarus that emerges from this section is that of a large, relatively profitable, and growing operation with a mature, reformminded manager who knows how to generate profits through diversification into processing and other non-agricultural activities. The main weakness of this portrait is that all the laudable features are probably the cause, and not the result, of reorganization. These features were embedded in the starting conditions, and did not evolve dynamically over time. Therefore, the whole issue of reorganized versus non-reorganized farms appears to be a question of selfselection: the better performing and more profitable farms with forward-looking reform-minded managers chose to reorganize in the first place, and their positive qualities persisted over time. Nevertheless, the novelty of reorganization and the special qualities of the managers in reorganized farms create a certain dynamic that gradually induces beneficial changes in workers' behavior, a departure from the traditional command-economy outlook on farm operation, and a more positive, forward-looking view of the relations between the farm and the new economic environment. These changes are still not quantifiable: they are only detected through the attitudes and responses of managers and workers. Yet they constitute the one tangible factor that points to some change in the right direction in human behavior in reorganized farms and gives hope for positive quantitative changes in future performance. 3.3 LAND IN RURAL HOUSEHOLDS: OWNERSHIP, TRANSACTIONS, AND SECURITY OF TENURE Changes in land tenure of rural households are one of the basic components of the land reform program in Belarus. Households were allocated additional land after 1991, and household plots were expected to pass into private ownership of families after 1993. Survey results show that the household plots indeed increased during the 1990's, but the progress with privatization of household plots has been less than expected. Significant Increase of Household Plots The average household plot increased from 0.38 hectare in 1990 to 0.58 hectare in 1999, a change of more than 50% (based on 689 households that report data for both years). The household plots increased in both reorganized and non-reorganized farms as part of a national program of land allocation. Yet the reorganized farms followed a more liberal program of land Outcomes of Farm Sector Reorganization: Evidence from the Field 43 redistribution, allocating on average 11% of their agricultural land to household plots, while the non-reorganized farms allocated on average 8% (Table 3.16). As a result the average household plot in reorganized farms increased by almost 60% since 1990, while in non-reorganized farms it increased less, by 40% only. Today, the average household plot in reorganized farms is larger than in non-reorganized farms (0.60 hectare compared with 0.55 hectare). The differences in percentage allocation and in plot size are both statistically significant. Table 3.16. Allocation of Land to Household Plots All sample Reorganized farms Non-reorganized farms 10 11 8 1999 0.58 0.60 0.55 1990 0.38 0.38 0.39 53 58 41 Percent of farmland in household plots, average per farm enterprise Average size of household plot, ha Percentage growth 1990-1999 Land allocation to households after 1990 shifted the distribution of plot sizes in the direction of more land (Figure 3.2). Thus, in 1990, almost 90% of household plots did not exceed 0.50 hectare of land; in Fig. 3.2. Size Distributionof Household Plots: 1990 and 1999 1999, only 50% of household plots remain that small. The other 50% of household plots are now larger than 0.50 80 percentof 744 respondents hectare, up from only 10% in 70 1990. Practically all household 60 plots surveyed are within the legal size limit of 1 hectare: the 50 I1990 number of plots above the legal 40 0E1999 limit is less than 1%. Yet 30 household plots today are 20 straining hard to keep their size 10 within the legal limit: 16% of plots have exactly 1 hectare of land, up from 1% in 1990. <0.25 0.26-0.50 0.51-0.75 0.75-1.00 >1.00 hectare Despite the significant increase in the size of household plots to date, many farm employees would like to have still more land. One-quarter of respondents indicate a desire to almost double their plot size from an average of 0.49 hectare to 0.90 hectare. The desired increase ranges from 0.1 hectare to 5 hectares. The tendency toward still larger plots as reflected in the desire of the rural population to acquire additional land indicates a need for an upward revision of the legal size limit of 1 hectare. Chapter Three: 44 Nonexistent Private Ownership of Land Household plots may be held in private ownership according to the 1993 Land Code. The government has promised to transfer the household plots from use rights to private ownership, and the local authorities bear the responsibility for implementing this process and issuing official title documents to the new land owners. In practice, however, a mere 3% of the land in household plots is privately owned (Figure 3.3). The rest is not even all in lifetime inheritable possession: 86% of land in household plots is reported in use rights from the state, and only 11% is in lifetime inheritable possession. A total of 7% of households in the survey report that at least some of their land is in private Fig. 3.3. Status of Land in Household Plots ownership. These findings from the household survey are generally consistent with the status of land as reported by farm managers. According to the managers (in either reorganized Lifetimeinheritable or non-reorganized farms), none of the 11% land in household plots is privately the of 80% nearly owned today; Private ownership number of parcels are in use rights and 3% about 20% of the parcels are in lifetime inheritable possession. Userights 86% As a reflection of the unclear status of land ownership in household plots, only 11% of respondents report All744 respondents that they have an official document certifying their rights to the land. Only one-third of households with documents have privately owned land; the other two-thirds have land in possession or user rights, and still report holding an official document for their land. Most of the households with documents (over 60%) actually had to pay for the document, although it is impossible to calculate the average cost due to inflation-related variability. Table 3.17 provides some indication of the reasons why the remaining 90% of respondents did not receive an official document for their land. One third of the respondents blame the lack of documents on the authorities, who have never informed the households of their rights in land. This reason may also explain the low percentage of land in private ownership: the local authorities are not doing anything proactive to privatize the land in household plots. Table 3.17. Reasons for Not Receiving an Official Document of Rights to Land Percent of respondents without documents (n=662) Authorities never informed me of my rights in land Land not officially valued 34 25 Don't have money to pay for document Documents kept by farm manager 12 Other reasons 33 5 Outcomes of Farm Sector Reorganization: Evidence from the Field 45 Land Transactions: Mainly Leasing by Households The land market is not developed at all, which is not surprising given the tiny proportion of privately owned land. Eight respondents in all (two farm managers and six employees) report having bought small plots of land (between 0.1 hectare and 1 hectare) between 1993 and 1995. The prices reported for these few transactions are widely different, because of the rapid changes produced by inflation during the span of two-three years. None of the respondents have sold land. Despite lack of buying and selling of land, about 10% of households (in either reorganized or non-reorganized farms) engage in leasing transactions to augment their household plot. The main source of the additional leased land for households is the collective enterprise, and leasing is generally short term (for a term of 1 year virtually for all households). The absolute amount of land that these few households lease is not large, about 0.25 hectare per household, but it constitutes a very substantial addition to the basic allotment of 0.50 hectare (Table 3.18). Through leasing, households manage to increase their holding to 0.75 hectare, compared to the average of 0.60 hectare among all households surveyed (the difference is statistically significant). Table 3.18.Sizeof Allotmentsin HouseholdsWithand WithoutLeasedLand All sample Households without leased land Households with leased land Basic household allotment 0.58 0.59 0.49 Additional leased land 0.03 -- 0.26 Total size 0.61 0.59 0.75 Percent of households 100 90 10 Land leasing is also reported among farm enterprises, although the frequency is even lower than among households. Five farms (four reorganized and one non-reorganized) lease out land to private farmers or other enterprises The size of the leased-out plots ranges from 17 to 160 hectares, and the lease term is 5-8 years. Generally Negative Attitude to Buying and Selling of Private Land Managers of reorganized and non-reorganized farms sharply differ in their attitude toward the proposal to allow buying and selling of privately owned land, i.e., land in household plots. More than 40% support the proposal among managers of reorganized farms, while among managers of non-reorganized farms the proportion of supporters is about 25% (Figure 3.4). The farm employees - the potential private owners of households plots - surprisingly have a very lukewarm attitude toward buying and selling of land: slightly over 20% of employees in both reorganized and non-reorganized farms are in favor of allowing buy-and-sell transactions in land. Moreover, only 3% of employees in both reorganized and non-reorganized enterprises recognize that they are allowed to sell the land in their household plots. Fully 97% report that they are not allowed to sell the household plot. This virtually universal view among 46 Chapter Three: the rural population is at variance Fig. 3.4. Positive Attitudetoward Buyingand Sellingof Land with the explicit legal provisions. The Land Code clearly states (in Article 87) that privately owned land percentof respondents parcels may be bought and sold (as 50 well as exchanged, mortgaged, and leased) The rural population thus 40 seems to be totally uninformed (or perhaps misinformed?) on the 30 _ Reorganizedfarms subject of their rights regarding NOReorganizeds m s~ ~ ~ ~ ~ ~ ~ ~ ~~~i Og;t,v1aNon-reorganized householdplots. 20 Despite the view that 10 household plots cannot be sold, 13 individuals (about 2% of 0 __X i__X _ respondents) know the price of land, Managers Employees which is reported at 1,214 thousand rubles per hectare by some and 2,000 thousand rubles per hectare by others. These knowledgeable individuals are not among the few who have actually sold small parcels of land, and they are probably reporting the official "normative" price per hectare. Security of Tenure Farm employees and pensioners are in general confident that they will retain their household plots in the future. About 60% of respondents are of the opinion that their tenure is secure. Yet nearly 30% are undecided on this issue and 10% indicate that they are uncertain about future tenure. Paradoxically, the sense of security of tenure is higher among households in non-reorganized farms than in reorganized farms: 65% of respondents in non-reorganized farms believe that their tenure is secure compared with 55% in reorganized farms (the difference in frequencies is statistically significant). 3.4. CREATION OF A PRIVATE FARMING SECTOR Creation of independent private farms outside the collectivist framework is one of the features of the process of land reform and farm restructuring in all former Soviet republics, including Belarus. Private farms are often created by families who leave the collective farm in the process of reorganization on land that they receive from the farm enterprise. In the present survey, only 10% of farm enterprises reported separation of independent private farmers, and on average 4 private farms were created for each of these farm enterprises (in the entire sample, the average number of private farms per farm enterprise of course is much lower: on average it takes 2.3 farm enterprises to create one private farm). Outcomes of Farm Sector Reorganization: Evidence from the Field 47 Main Reasons for Becoming a Farmer The survey covered 30 private farms, two-thirds of which were created as part of the early wave in 1991-1993. Generally, these are single-family farms (only 10% are created by two families), and they are all officially registered with the authorities. Almost 60% of the farmers previously worked in a farm enterprise (a collective or state farm); the rest worked in industry or services (mainly local government). People come to private farming from relatively high positions in their former jobs: 60% of respondents had held managerial or professional jobs, and almost 25% described themselves as skilled worker in their previous position. Private farmers thus bring with them a rich agricultural experience to their new occupation. Table 3.19. Reasons for Becoming a Private Farmer as Reported by Actual and Potential Private Farmers (percentof respondents) Privatefarmers* 57 57 53 20 23 10 3 Farmemployees** 40 16 18 20 7 0 Desireto workindependently,withoutmanagers Desireto realizeprofessionalknowledgeand experience Desireto ensurethe children!future Forcedbecauseof inadequateincomefrom collectivefarm Desireto eam more Desireto increasefamilyprestige Otherreasons -*All respondents(n=30);multipleanswersallowed. ** Percentof respondentsamongthose whoplanto becomea privatefarmer(6% of n=744);single-choice answers. The main reasons for becoming a private farmer are shown in Table 3.19. The most important reason are desire for independence, realization of one's creative potential (including professional knowledge and experience), and desire to ensure the children's future. Employees of farm enterprise who plan to become private farmers in the future report basically the same ranking of main reasons (last column in Table 3.19). A relatively important reason for the decision or the future intention to become a private farmer is inadequacy of income from the farm enterprise: 20% of respondents among both actual and potential private farmers attribute their decision to be a private farmer to the inability of the farm enterprise to provide sufficient income for their families. Although this is not the major reason for the decision to leave the collective farm in Belarus, the finding recalls the situation in Moldova, where inadequacy of income from the farm enterprise is cited by 60% farm employees as the reason for deciding to leave and become a private farmer. Practically none of the private farmers who left a collective farm (16 out of 18) received their property share in cash or in kind on exit. Of the two farmers who did receive their property share on exit, one received its cash equivalent and one received physical assets. This result is not surprising given the low frequency of reorganized farms in the country and the smallness of the sample: property shares are a prerequisite for enabling members to exit with some value, and they are distributed only upon reorganization. Exit from a farm enterprise with a property share typically requires the approval of the general meeting of shareholders (reported by 80% of the reorganized farms that have issued property shares). This is a natural procedure in collective or cooperative organizations, and although no approval of authorities outside the farm is required, 48 Chapter Three: approval by general assembly is a fairly lengthy and complex process originally intended for an entirely different set of conditions. Under the present circumstances, it is not very conducive to smooth and easy exit during reorganization. Employees of fann enterprises are the natural pool of new private farmers for the future. Given their attitudes, however, the prospects for growth in private farming appear to be bleak. Over 90% of farm employees have no intention of becoming a private farmer, and only 6% indicate positively that they have plans to establish an independent private farm. The distribution of responses is the same for individuals with and without property shares. Table 3.20. Why Employees of Farm Enterprises Do Not Plan to Become Private Farmers (percent of respondents among 92% of surveyed who do not plan to become a private farmer) Percent of respondents Attitudes to risk Don't want to change my life style 24 Don't want to risk uncertainty 20 Resource considerations Insufficient capital 20 Difficult to find inputs 6 Personal considerations Too old and unhealthy 14 Inadequate personal qualifications (not enough economic and legal knowledge) 1 Income considerations Better income in farm enterprise 5 Don't want to lose social benefits 3 Non-supportive environment Uncertain legal situation 4 Land related issues (lack of good land for private farms, prohibition to buy and sell) 1 Social considerations (negative attitude in the village, reluctance of other fanmilymembers) 2 Total 100 The reasons for not planning to become a private farmer are summarized in Table 3.20. Risk aversion, which includes reluctance to change the known life style, is the most important barrier to private farming, cited by 44% of respondents as the reason for remaining in the old farm enterprise. It is followed by considerations related to shortage of resource (capital, inputs), which are cited by 26% of respondents as an obstacle. Income considerations and various legal and practical factors relating to non-supportive environment appear to have a marginal role in the decision. Personal considerations (age and health) are naturally important. Land in Private Farms The average individual farm controls 75 hectares, 80% of which is arable land. The smallest farms in the sample are around 15-20 hectares, and the largest farms have between 100- 49 Outcomes of Farm Sector Reorganization: Evidencefrom the Field 200 hectares, although one farm reports 600 hectares, with 400 hectares of arable land. The distribution of farm sizes is shown in Figure 3.5. Overall, 50% of the farms fall between 35 hectares and 70 hectares. The number of land parcels in private farms is between one and five. The median number of parcels is three. Since the household plot generally consists of two parcels, one near the house and the other in the perimeter fields, a typical private farm received its commercial land allotment in one parcel. Three-quarters of the land of theeland Th privatee-arteris in private farms is in lifetime inheritable possession and the rest is leased (Table 3.21, Figure 3.6; land in use rights shown in 35 percentof farms Figure 3.6 is reported by one 30 relatively large private farm, and judging by some other signs this is probably leased land). The very small component of privately owned land is the household plot held by the farmer's family, not the land used for commercial Fig. 3.5. Size Distribution of Private Farms 25 20 _ 15 10 5 less than 15% of private farmers surveyed, but they lease a relatively large amount of land and their farms are the largest (Table 3.21). The farms with leased land are on average much larger than farms that do not lease land. They report a base allocation of 100 hectares plus 130 hectares leased. Land is typically leased from the local authorities, but about 20% is leased from the collective enterprise. The leasing term is for 5-10 years. <25 26-50 l _ _ farming. Leasing is reported by 51-75 76-100 l ll >150 101-150 hectare Fig. 3.6. Status of Land in Private Farms Lifetimeinheritable 73% Privateownership 0% ased No transactions in land 23% are reported other than the few instances of leasing from the Use rights state. None of the farmers 4% surveyed reports leasing out land to other users, as the law prohibits subleasing of land given in lifetime inheritable possession. None of the farmers reports buying or selling of land, although the land in household plots is supposed to be privately owned and thus eligible for land market transactions. Chapter Three: 50 Due to restrictions on buying and selling of land and prohibition of subleasing by private farmers, leasing from the state, or possibly from the local farm enterprise, is the only way to increase the farm size. The largest private farms in the sample have indeed been built through leasing of state land. However, many other farmers express a wish to increase their holdings. Fully two-thirds of respondents would like to get more land so as to increase their average farm by more than 75%, from 80 hectares to 140 hectares. Reflecting the general desire to increase the farm size in the face of administrative obstacles, farmers overwhelmingly support the proposal to allow buying and selling of land. ,Over80% of farmers are firmly of the opinion that buying and selling of land should be allowed. This is in clear contrast to the lukewarm views of farm managers and farm employees on the subject (see Figure 3.4 above). Most farmers (60%) are even willing to pay for an official document on condition that it will allow them to buy and sell land. The median price that the farmers say they are prepared to pay for such a document is 5 million rubles. Table 3.21. Size and Structure of Tenure in Private Farms (in hectares) All farms (n=30) Farms without leased land (n=26) Farms with leased land (n=4) Total holdings 75 50 237 Lifetime inheritable possession 58 109 Private ownership 0.06 50 0.07 0 Leased 17 0 128 None of the farmers has an official document certifying the rights to land. This curious finding may be due to confusion with the interpretation of the question: farmers may have thought that the question referred to ownership documents, and not documents certifying tenure or use rights. The ambiguity with documented use rights is reflected in the farmers' feeling that their tenure is far from secure. About one-third of the farmers are confident that they will keep their land in the future. The other two-thirds, however, are uncertain or undecided about security of tenure. Labor in Private Farms The average private farm operates with 4.3 permanent workers, augmenting the base labor force with 4.7 seasonal hands in peak time. There is a strong correlation between the size of the farm and the number of permanent workers it employs. Regression analysis shows that one additional permanent worker is required when the amount of land is increased by 25 hectares. Private farms employ 7 permanent workers per 100 hectares. Seasonal workers raise the labor intensity to 10-12 workers per 100 hectares, depending on the full-time equivalent weighting used for seasonal help. The overall labor intensity of private farms in Belarus is thus comparable to (or perhaps slightly higher than) that of farm enterprises (see Table 3.8). 51 Outcomes of Farm Sector Reorganization: Evidence from the Field Table 3.22. Structure of Labor Resources in Private Farms Average number of workers per farm Percent of farms using specific type of labor Permanent labor 4.3 100 Permanent family members 2.9 100 Permanent hired workers 1.4 30 Seasonallabor 4.7 47 Seasonal family members 0.8 NA Seasonal hired workers 3.9 33 Members of the extended family (including friends and relatives) contribute two-thirds of the permanent labor, while hired workers account for the remaining one-third. Seasonal labor, on the other hand, is mainly hired help, with relatively small participation from the family. The of labor structure resources private in an average surveyed, by half the private farmers but the of private farmers, by one-third hiring is also reported hired help. Seasonal farmers Less than 15% of private hirers do not overlap. and seasonal of permanent over and slightly hired labor, 20% hire only seasonally, and seasonal both permanent is reported permanent groups employ 15% use permanent workers without any seasonal hiring. Farmers by a single family outside the collectivist established Generally some of the difficulties to overcome cooperation to voluntary imperfect (Table hired with Other Cooperation resort farm is shown in Table 3.22. Use of hired labor of private farms employ and almost one-third environment. market 3.23). The main joint consulting. Sharing of machinery cannot afford farmers consulting professional of agricultural Over activities specialists to purchase is probably framework, private farms presented by the highly with other farmers cooperation report 60% of farmers and access to professional include use of machinery is a natural solution in an environment where individual on their own, whereas farm equipment all the necessary by the body services provided for the extension a substitute in the collective farm enterprise. Table3.23. CooperationamongPrivateFarmers Joint activity Percent of farmers reporting specific activity Use of farm machinery 37 Professiorial consulting 33 Production 17 Sale of farm products 13 Purchase of farm inputs 7 Mutual credit 10 Processing 0 Other 3 52 Chapter Three: Half the private farms are member in a formal association (Table 3.24). Practically all association members report cooperation in joint activities as listed in Table 3.23, but cooperation in fact extends also to some farmers who are not association members. The function of these new farmers associations is not entirely clear: they are neither production cooperatives (only 20% of association members report joint cultivation of land) nor service cooperatives (fewer than 10% of association members report using the association services to sell products or purchase inputs). They may have a role in overseeing the joint use of farm machinery reported by nearly 40% of private farmers, although the survey did not include a specific question to elucidate this point. Most associations reported by private farmers are quite large - 30 members and more, but these large associations are concentrated in two oblasts only (Grodno and Gomel). T'able3.24.Associationsof PrivateFarmers Oblast Number of respondents reporting association membership Size (number of member farms) Brest 1 35 Gomel 4 81 Grodno 5 30-33 Minsk 1 2 Mogilev 3 3-8 Vitebsk 0 All country 14 (47% of respondents) Managerial Behavior of Private Farmers Practically all respondents (over 75%) feel that they have complete freedom in making production and sales decisions. The major goal of individual farm as an enterprise is maximization of profits (66% of respondents). Other reasons (ensuring food supply for the country and the family, employment for family members, additional income, minimization of costs of production) have much lower scores (about 30% of respondents). Over 90% of the farmers agree that their independence in decision making has increased since their farm was established. Virtually all the farmers indicate that they are paying more taxes and that the attitude of the tax authorities has become more severe. Diversification into non-agricultural activities are a significant feature of private farms. Fully 40% of farmers surveyed are engaged in activities outside primary agriculture. These activities mainly involve provision of mechanical field services and transportation, which are both related to the widespread sharing of farm machinery and equipment discussed previously. Processing, trade, or intermediation are not reported by any of the respondents. The-importance of non-agricultural activities for farm enterprises has been discussed previously (see Sec. 3.2). It seems that private farmers also realize that survival requires a business portfolio not restricted to traditional primary agriculture. 4. Production and Productivity: Collective and Individual Sector Compared The analysis of reorganization outcomes in Chapter 3 has revealed very little change since 1995. All farms generally kept (and even slightly increased) their land holdings, the number of workers declined by a mere 5%, and reorganization did not involve any internal restructuring for greater efficiency apart from distribution of property shares. Most of the favorable differences observed for the reorganized farms relative to the non-reorganized collectives were found to be attribi4tableto different starting conditions. In this chapter, we refine the comparative performance analysis of farms of different organizational forms in two directions: on the one hand, the performance of reorganized farm enterprises is compared with that of non-reorganized collectives using additional quantitative measures that were not applied in Chapter 3; on the other hand, the performance of private farms is compared with that of farm enterprises as a group. The comparative analysis starts with a general description of agricultural production in farms of different organizational forms, and then examines questions of partial productivity and productive efficiency across different farm categories. Theoretically, we expect to see better performance in reorganized farms than in non-reorganized entities, and we expect private farms to outperform farm enterprises. Unfortunately, the empirical results are quite ambiguous on these issues. 4.1 PRIMARY AGRICULTURE Diversified Production Agricultural production in Belarus is highly diversified. All farm enterprises produce both crops and livestock. Among andIndividual Figure4.1. ProductMixof FarmEnterprises individual farmers, 60% of respondents report that they produce crops and livestock, while 40% produce crops only. The difference in frequencies of crop and livestock producers among farm enterprises and individual farms is reflected in their product mix. By value of production, private farmers produce 100%p _ 80% _ Livestock 60% mainly crops, while the output of farm enterprises is more evenly balanced between crops and livestock (Figure 4.1). In farmnenterprises, crops account for about 40% by value of output, while livestock products account for 60%. loCrops 40 20% 0 Reorganized 53 Non-reorganized Individualfarms Chapter Four: 54 There are no differences in product mix between reorganized and non-reorganized farm enterprises (Figure 4.1). Individual farms, on the other hand, concentrate on crops, which represent 85% by value of output; their involvement in livestock production is marginal. This is a standard phenomenon observed in all farm surveys in CIS, and it may have two possible explanations. One is that private farmers shy away from the unprofitable livestock production because they are more responsive to market signals and less prone to pressures from local administration striving to preserve the livestock herd in each region. The other explanation is that livestock production is much more capital-intensive than crops, and shortage of investment funds prevents individual farmers from going into this subsector. Table 4.1. Farms of DifferentOrganizationalForms that Producethe SpecifiedCommodities(percentof respondentsin each category) Grain Oilseeds Sugar beet Potatoes Vegetables Fruits Reorganized farms (n=48) 100 56 48 92 38 33 Non-reorganized farms Private farmers (n=30) (n=33) 90 100 7 48 10 36 63 94 23 15 7 18 Households (n=744) 55 --100 89 48 Beets for feed Corn for silage 94 83 100 79 13 10 --- Hay 94 97 57 26 Table 4.1 shows the share of farms that are involved in production of a particular crop. Grain is the most widespread crop: it is produced by all farm enterprises and by 90% of individual farmers. Most farm enterprises, given their large endowments of land, diversify among all the major crops in the list, except fruits and vegetables: the median number of crops in farm enterprises is 6 (there are no differences between reorganized and non-reorganized farms in this respect). Most private farmers, on the other hand, produce between 1 and 3 crops on their substantially smaller farms: in addition to grain, these are mainly potatoes and hay, while the rest of the crops are reported with Figure 4.2. Median Number of DifferentCrops Reported by relatively low frequencies. Producers As a result, the median in crops of number individual farms is 2, and 90% of farmers concentrate Farm enterprses in 1-2 different crops only. farmof Households employees enterprise Individualfarms produce primarily potatoes and vegetables, with about half the households reporting H fruits and grain. Household Househ plots, although even smaller than private farms, are 7 6 5 4 3 2 1 ° somewhat more diversified: the median number of crops numberof crops Production and Productivity: Collective and Individual Sector Compared 55 grown in household plots is 3 (compared with 2 for individual farmers), and 90% of household plots grow 2-4 different crops (compared with 1-2 for individual farmers). Figure 4.2 shows the diversification pattern among different crops for the three categories of producers. Cropping Pattern and Production Volumes The cropping patterns in farm enterprises and individual farms are generally similar despite the lower diversification of individual farms (Table 4.2). Most of the area in all farms is under grain, primarily barley, followed by wheat and rye. Fodder crops are the second most important user of land, although in individual farms they occupy a smaller share of the cropped area in line with the smaller importance of livestock production in these farms. The share of the area under industrial crops (oilseeds, sugar beet) is equally small in individual farms and farm enterprises. Private farms differ from farm enterprises mainly in the substantially higher share of land under potatoes and vegetables, the traditional crops of the individual sector in all CIS countries, which are typically grown both for own consumption and for sale. Table4.2. CroppingPatternin Farmsof DifferentTypes(percentof total croppedareain 1998) Reorganized farms Grain Wheat Barley Rye Oilseeds Sugar beet Potatoes Vegetables Fruits Beets for feed Cornfor silage Hay Total cropped Cropped-to-arable, % 55 10 18 13 1 4 2 0.2 1 2 7 26 2,467 ha 88 Non-reorganized farms 52 7 14 17 2 1 3 0.3 0.3 2 5 33 1,849 ha 90 Private farmers 63 13 27 12 2 3 10 2 0 0 0 18 51 ha 84 Households 24 ----- -55 8 3 --10 0.58 ha 100 Household plots naturally display a different cropping pattern. Most of the land in household plots is under potatoes and vegetables (63% combined), which are the main traditional crops for consumption in the family. Grain and hay for animals account for most of the remaining area. While 10%-15% of arable land remains uncropped in farm enterprises and even in individual farms, households utilize their small plot to the maximum: the entire household plot of 0.6 ha is cropped. While the cropping patterns are generally similar for farm enterprises and individual farms, the production volumes diverge by one or two orders of magnitude (Table 4.3). The difference in crop production volumes is naturally due to the difference in farm size: the average cropped area is over 2,000 ha in farm enterprises and 50 ha in individual farms (see Table 4.2). The tiny household plots produce much less even than the individual farmers. Their main output is slightly over 4 tons of potatoes and 1 ton of hay. The quantities of all other crops (including grain) are around half a ton or less. 56 Chapter Four: Table 4.3 Production Volumes for Different Categories of Farms (tons per farm in 1998) Grain Reorganized farms 4,247 Non-reorganized 2,358 Private farmers 85 Household plots 0.60 130 72 13 -- Oilseeds Flax 64 66 33 -- Sugar beet 7,531 2,281 92 -- Potatoes Vegetables Fruits and berries Beets for feed Corn for silage Hay 869 339 439 2,242 5,822 6,421 852 1,149 25 1,510 3,379 4,145 73 43 1 43 131 63 4.28 0.45 0.24 --- 1.46 Livestock Production and Herd Size Contrary to fairly similar cropping patterns, the composition of the livestock herd is far from uniform in farms of different organizational forms. Cattle, cows, and pigs are the most widespread animals in farm enterprises (Table 4.4). Table 4.4. Farms Reporting Livestock and the Average Number of Animals Reorganized Non-reorganized farms Individual farms Household plots Cattle 98 100 40 70 Cows 98 100 30 70 Pigs 50 52 40 91 Poultry 6 6 17 81 Horses Herd size per farm* 94 91 13 6 Cattle 2,660 1,871 12 1 Cows 784 557 3 1 Pigs 5,485 820 33 2 141,476 76,250 372 10 88 48 3.5 1 Milk 2,600 1,700 8.3 3.4 Beef 340 200 4.6 0.1 Pork 740 110 2.7 0.2 Poultry meat 1,100 9 0.2 0.0 20,500 12,500 -- 1.5 Percentage of farms Poultry Horses Production per farm (ton)** Eggs (thousand pieces) * Average (median for household plots) number of animals for farms reporting the particular species. Average for farms reporting production of particular commodity. ** Production and Productivity: Collective and Individual Sector Compared 57 All farm enterprises have cattle and cows (on average over 2,000 head of cattle and 700 cows per farm); half the enterprises keep pigs in fairly large numbers (especially reorganized enterprises, which average over 5,000 pigs per farm, compared with less than 1,000 pigs in the smaller non-reorganized enterprises). Among individual farmers, only 40% report cattle, cows, or pigs. Among household plots, 70% report cattle and cows and practically everybody have pigs. The number of cows and pigs in individual farms and household plots is one or two orders of magnitude less than in farm enterprises. As with crops, this difference in herd size is reflected in volumes of livestock production: farm enterprises produce thousands and hundreds of tons of meat and milk, while individual farms and household plots produce thousands and hundreds of kilograms. Poultry is widespread only among household plots (80% of respondents). Among farm enterprises, only 6% report poultry, averaging over 100,000 birds per farm (Table 4.4). Yet these are not specialized "chicken factories," as in addition to 100,000 birds they also have the usual complement of other animals: thousands of head of cattle, hundreds of cows, and thousands of pigs. Sheep and goats are not very popular in Belarus: hardly anyone in the sample reports these animals, and there is no production of mutton or goat meat among any of the farm types. 4.2 PARTIAL PRODUCTIVITY INDICATORS There are clear scale differences in farm structures, first between the collective sector and the individual sector, and then within the collective sector between reorganized and nonreorganized farms. Farm enterprises are orders of magnitude larger than private farms and household plots. This means that they use more resources (land, labor, purchased inputs) and produce more output. Among farm enterprises, the reorganized farms are on average larger than the non-reorganized farms: they use more land and more labor (see Table 3.3) and they produce more crops and livestock products (see Tables 4.3, 4.4). Calculation of partial productivities adjusts for scale and produces measures of production per unit of specific inputs. Partial productivities thus can be used to compare the performance of farms of different organizational forms, such as farm enterprises versus individual farms, or reorganized farm enterprises versus non-reorganized ones. The most commonly calculated partial productivities are the partial productivity of land, the partial productivity of animals, and the partial productivity of labor. Partial productivity of land can be calculated in either quantity or value terms. Thus, crop yields represent the physical quantity of a particular crop produced per hectare of agricultural land. Alternatively, partial productivity of land in value terms is calculated by dividing the value of output by the amount of land used: the result is output in money terms per hectare of agricultural land. Animal productivities are typically calculated only in physical terms as the quantity of milk per cow (per year or per day), the number of eggs per layer, the number of piglets per sow, or the daily weight gain per animal. Labor productivities are calculated in value terms by taking the ratio of the output to the number of employed or the labor input in man-day. 58 Chapter Four: Physical Yields: Crops and Animals Table 4.5 presents the yields of the major crops achieved in reorganized and nonreorganized farm enterprises, individual farms, and household plots. Reorganized farms, despite their larger size and greater resource endowment, do not have a clear advantage in crop yields compared to non-reorganized farms: although the mean crop yields for reorganized farms are somewhat higher than for non-reorganized ones, the differences are not statistically significant. The same applies to the comparison of individual farms with farm enterprises, and to the comparison of the entire individual sector (including household plots) with farm enterprises: the crops yields observed for farms of different organizational forms are statistically indistinguishable. Table 4.5. Mean Crop Yields for Farms of Different Organizational Forms (kg/ha) Grain Wheat Barley Rye Sugar beet Potatoes Reorganized 2,709 3,138 2,824 2,616 33,319 14,732 Non-reorganized 2,407 2,670 2,515 2,443 34,708 13,110 Private farms 2,541 2,922 2,649 2,778 40,556 14,479 Household plots 2,517 ----- 13,757 Table 4.6. Mean Livestock Productivity Indicators for Farms of Different Organizational Forms Reorganized farms Non-reorganized farms Private farms Household plots Milk yield per cow (kg per year) 3,055 2,827 3,460 3,200 Daily gain, cattle, kilograms 0.426 0.380 0.620 0.550 Daily gain, pigs, kilograms 0.360 0.260 0.450 0.380 Number of piglets per sow 14 13 10 9 The situation with livestock productivity indicators (Table 4.6) is more diverse and perhaps more ambiguous. First, the differences in milk yields per cow are not significant across farms of all organizational forms. This common indicator fails to detect any differences in partial livestock productivity between reorganized and non-reorganized farm enterprises, between farm enterprises and individual farmers, and between farm enterprises and the individual sector as a whole. On the other hand, the daily weight gain (for both calves and pigs) is significantly higher for reorganized farm enterprises than for non-reorganized ones; it is furthermore significantly higher for individual farms than for farm enterprises. The number of piglets per sow adds a final confusing result: the difference between reorganized and non-reorganized farm enterprises is not statistically significant, while for private farms (where over 90% have pigs) the number of piglets per sow is significantly lower than for farm enterprises. To summarize the results obtained for crop and livestock productivities, we can say that overall no significant differences are observed across farms of different organizational forms.. Two livestock indicators - daily weight gain of calves and pigs - are significantly higher for individual farms (compared with farm enterprises) and for reorganized farm enterprises Production and Productivity: Collective and Individual Sector Compared 59 (compared with non-reorganized farms). Other than that, the partial productivities of crops and livestock are largely the same for all farms. Partial Productivity of Land, Labor, and Assets Land, labor, and assets are the three main inputs that all farms use to produce output. Measures of partial productivity are obtained when we divide the value of output by the stock of land (output per hectare), the number of workers (output per worker), or the value of assets (output per unit value of assets). Output can be proxied by sales revenue, and the corresponding three partial productivity measures are sales per hectare, sales per worker, and sales per unit value of assets. The survey provided data that could be used to calculate all these productivity measures in 1998 for reorganized and non-reorganized farms; in addition four of the six productivity measures could be calculated also for individual farms (the value of assets for individual farms was not available in the survey database). The various productivity measures for farms of different organizational forms are presented in Table 4.7. Judged by the output-based productivity measures, reorganized farm enterprises are not more productive than non-reorganized ones. Among the sales-based productivity measures, sales per hectare is the only measure that is significantly higher for reorganized farms than for non-reorganized farms; the differences in the other two measures sales per worker and sales per unit of assets - are not statistically significant. Comparisons between individual farms and farm enterprises similarly fail to provide evidence of significant productivity differences for these organizational forms. Individual farms are not more productive than farm enterprises by any of the partial productivity measures in Table 4.7. Table 4.7. Partial Productivity of Land, Labor, and Assets in 1998 Reorganized farms (n=48) Non-reorganized farms (n=33) Individual farms (n=30) Output per ha (million rubles) 21 17 19 Output per worker (million rubles) 207 196 295 Output per 1000 rubles in total assets 453 501 -- Sales per ha (million rubles) 16* 11* 12 Sales per worker (million rubles) 155 122 221 Sales to 1000 rubles in total assets 315 285 *Difference between reorganized and non-reorganized farms statistically significant at 10% level. -- Thus, the picture provided by partial productivities of land, labor, and assets is as ambiguous as the picture of physical yields in crop and livestock production. We do not find clear support of the hypothesis that reorganized farm enterprises perform better than nonreorganized ones; nor is there evidence from partial productivities to support the theoretical view that individual farms outperform the large collectives. At the same time, the findings do not support the traditional view of socialist agricultural economists that large-scale farms perform better than smaller farms. 60 Chapter Four: Changes in Productivity Over Time Comparison of productivity results over time is difficult because of the effect of inflation on values of output and sales. Money values for 1990 and 1995 are totally incomparable with the results for 1998. In addition to 1998 values, however, the survey contained information on the output of farm enterprises in constant 1983 prices. This information is routinely provided in the financial reports of farm enterprises, but it is not available for private farmers. Table 4.8 presents the partial productivity of land and labor calculated for three points in time (1990, 1995, 1998) using the value of output in constant 1983 prices. Output per worker is not significantly different between reorganized and non-reorganized farms in each of the three years. Output per hectare is higher for reorganized farms in two of the three years: the differences are statistically significant in 1990 and 1998. Table4.8. PartialProductivityof LandandLaboroverTime:1990.1998 Reorganizedfarms 1990 1995 1998 Outputper ha (constant1983rubles) 1,100* 800 930* Outputper worker(million 1983rubles) 10,300 7,500 9,200 Non-reorganizedfarms 1990 1995 1998 940* 730 730* 10,100 7,800 8,600 *Difference between reorganized and non-reorganized farms for corresponding years statistically significant at 10% level. Thus, the higher productivity of land observed for reorganized farms in 1998 by one of' the measures in Table 4.7 (sales per hectare) is not necessarily an outcome of reorganization: it is more probably a result of the initial conditions, which led to higher productivity of land in these farms already in 1990. This conclusion based on examination of changes in productivity over time reinforces the previous statement about path dependency made in Chapter 3. Thus, Table 3.9 has led us to the conclusion that the differences in size, resource endowment, sales, and profits between reorganized and non-reorganized farms are not a reflection of a dynamic process of reorganization but most likely a result of different initial conditions for the two groups of farms. The results in Table 4.8 also show that output per hectare and output per worker (in constant prices) declined from 1990 to 1995-98 for both reorganized and non-reorganized farms. The decline is statistically significant by the two measures. This indicates that not only the volume of agricultural production (as demonstrated in Chapter 1) but also the productivity of agriculture decreased during transition. 4.3. PRODUCTIVE EFFICIENCY The discussion of changes in partial productivities in the preceding section examined the impact of reorganization on each input separately. Yet production depends on a whole bundle of inputs applied simultaneously, and it is therefore relevant to assess the impact of reorganization on total measures of productive efficiency. These total efficiency measures relate the value of output produced to all the inputs used in the process of production. Several standard techniques are available for comparing total productive efficiency for farms of different types (in our Production and Productivity: Collective and Individual Sector Compared 61 context, organized and non-reorganized farms; or farm enterprises and individual farms). These include, among others, the production function technique, total factor productivity, and technical efficiency analysis. Production Function Approach Perhaps the best known and most widely used is the production function approach, which employs ordinary-least-squares multiple regression to construct the production function for farms of different organizational forms. The organizational forms are represented by a dummy variable, and the impact of reorganization on performance is determined by the regression intercept. If, say, the production function for reorganized farms "lies above" the production function for nonreorganized farms and the difference is statistically significant, we can say that reorganized farms are more productive or more efficient that non-reorganized farms. The efficiency advantage in percent can be estimated from the difference in intercepts. The production function was estimated using survey data for 1998. The Cobb-Douglas model related the value of production in 1998 to a number of input variables, including agricultural land, number of workers, number of animals (expressed in standard head), and cost of purchased inputs. Several alternative specifications were tried using various measures of output (e.g., sales and sales adjusted for own consumption) and various combinations of inputs (e.g., adding machinery and fixed assets in various forms). The production function results failed to detect any statistically significant differences in productive efficiency between reorganized and non-reorganized farms or between private farms and farm enterprises. According to the production function method, reorganized farms are not more efficient than non-reorganized farms, and individual farms are not more efficient than farm enterprises. Total Factor Productivity Total factor productivity (TFP) is calculated as the ratio of the total value of output to the total value of inputs used to produce that output. It is thus a measure of the value of output that a farm produces per unit of input costs. It differs from partial productivities in two respects. First, it measures output per unit of input costs, while partial productivity usually measures output per unit of quantity used. Second, it measures output per unit cost of all aggregated inputs used in the production process, and not just one particular input, such as land or labor. To be used as a comparative measure of efficiency, TFP should be calculated at world market prices for inputs and outputs. Our calculations for Belarus were carried out at reported domestic prices, which are highly distorted by government controls. The results cannot be used to make any inference about the efficiency of Belarusian agriculture relative to agriculture in market economies. Yet they can be used to compare the efficiency of different organizational forms that operate in the same distorted environment. In 1998, TFP for the farm enterprises in the survey was 0.9. This means that one unit of money spent on inputs produced only 0.9 units of output value. The value of production was less than the total cost of inputs (including labor), and farms were in fact creating negative value. 62 ChapterFour: Only 15% of farm enterprises in the sample achieved total factor productivity of 1.0 or slightly higher and thus managed to produce some surplus value. The difference between total factor productivity of reorganized and non-reorganized enterprises was not statistically significant. The situation with total factor productivity is more encouraging for private farmers. Although one-quarter of respondents did not provide the information needed to calculate total factor productivity, among the rest the mean TFP is 1.9 and only 30% of this group of respondents have TFP less than 1. The TFP for private farms is significantly higher than the TFP for farm enterprises: the difference between the two means of 1.9 and 0.9 is statistically significant. However, the input costs reported by private farmers do not include any imputation of the cost of family labor (although they do include the cost of hired labor). This omission may bias the TFP of private farms upward compared with that of farm enterprises. The total factor productivity results obtained in the sample are on the whole consistent with the TFP calculation performed for the entire farm sector in Chapter 1. Data derived from the consolidated financial reports of the Belarusian farm sector (representing all 2,500 farm enterprises) produced TFP of 1.02 for 1998 and showed that this value remained around 1 throughout the 1990's. This value is very close, within the margin of statistical error, to the TFP of 0.9 obtained using the survey data. Technical Efficiency Analysis: Production Frontier Approach Another increasingly popular technique for measuring the impact of reorganization compares the so-called technical efficiency of farms of different organizational forms. The technical efficiency of a productive unit is usually expressed by its relative distance from the production frontier, which is the locus of maximum attainable outputs for each given combination of inputs. The technical efficiency score attains the highest value of 1 for farms on the frontier, and decreases for farms at greater distances from the frontier. In the absence of a theoretical production frontier, an empirical frontier is estimated from the actually observed bundles of inputs and outputs. Technical efficiency was estimated from survey data by so-called Data Envelopment Analysis (DEA), a non-parametric linear-programming technique that constructs a deterministic production frontier and allows variable returns to scale. Several analyses were run, based on the available data. First, the technical efficiency of reorganized and non-reorganized farms was determined at two points in time: 1995 and 1998. Second, the technical efficiency of private farms and farm enterprises (both reorganized and non-reorganized) was determined for one year only, 1998 (as no private-farm data were available for 1995). The analyses for farm enterprises were carried out using two different combinations of variables for inputs, which are summarized as Set 1 and Set 2 in Table 4.9. Set 1 includes variables. that are identical to those used in a recent analysis of technical efficiency of reorganized and non-reorganized farm enterprises in Ukraine.6 Set 2 includes unique input 6 Z. Lerman and C. Csaki, Ukraine: Review of Farm Restructuring Experiences, World Bank Technical Paper 459, Europe and Central Asia Environmentally and Socially Sustainable Development Series, The World Bank, Washington, DC, 2000. Production and Productivity: Collective and Individual Sector Compared 63 variables that were provided by the present farm survey in Belarus and are close to the standard inputs used in technical efficiency analysis in the literature. Consistently with our previous observation that reorganized farms are on average larger than non-reorganized farms, Table 4.9 indeed shows that reorganized farms used more of each input and produced more output (both in 1995 and in 1998). This pattern of inputs and outputs in Table 4.9 suggests that we should indeed move to total productivity measures to assess and compare the overall productive efficiency of farms of two types. Table 4.9. Variables Used in Technical Efficiency Analysis of Farm Enterprises (per-farm means) Variables Reorganized Set 1: Output, constant 1983 prices Agricultural land, hectare Animals, standard head Number of workers Cost of purchased inputs, mlnruble Set 2: Output , constant 1983 prices Agricultural land, hectare Labor,man-days Feed, ton Fertilizer, ton Electricity, mln kW-hr Machinery, HP 1995 Non-reorganized Reorganized 1998 Non-reorganized 3,730 3,827 2,670 338 14,189 2,229 3,040 1,683 228 6,075 4,583 3,931 2,791 317 104,348 2,334 3,094 1,629 213 41,931 3,730 3,827 135,866 10,239 836 1,536,592 13,678 2,229 3,040 104,373 7,749 559 1,099,015 9,688 4,583 3,931 118,762 11,605 983 1,721,094 11,777 2,334 3,094 69,087 8,309 599 959,627 8,733 The mean technical efficiency scores obtained for the two categories of farm enterprises in 1995 and 1998 are presented in Table 4.10. In both time periods, reorganized farms achieve higher technical efficiency scores than non-reorganized farms. In 1995, the difference between these technical efficiency scores is not statistically significant for both combinations of variables. In 1998, on the other hand, both technical efficiency scores are significantly higher for reorganized farms than for non-reorganized farms. This may provide a tentative indication of dynamic performance improvement in reorganized farms relative to the non-reorganized sample - a phenomenon that we have so far been unable to observe using other indicators. Table4.10.TechnicalEfficiencyScoresof FarmEnterprisesfor 1995and 1998 (DataEnvelopmentAnalysis withvariablereturnsto scale) Variables Reorganized farms (n=48) 1995 Non-reorganized farms (n=33) Set 1 0.54 0.49 Set 2 0.80 0.76 *Difference statistically significant at 0. 1 level. Reorganized farms (n=48) 0.45* 0.83* 1998 Non-reorganized farms (n=33) 035* 0.74* Yet the average technical efficiency score is quite low even for reorganized farms in 1998 (0.5-0.8 out of the maximum achievable value of 1). This implies that relatively few reorganized 64 ChapterFour: farms actually attain the efficient frontier and many of them lie at a considerable distance from the frontier. On average, Belarusian farm enterprises in 1998 were producing 20%-50% less output (depending on the variables used in the analysis) than the best performing farms in the sample for a given bundle of inputs. These results are close to the technical efficiency scores of farm enterprises in Ukraine, which averaged 0.5-0.7 relative to a production frontier derived with a similar set of variables (see the reference in footnote 1). The technical efficiency scores suggest that, in both countries, there is a tremendous potential for more efficient use of inputs and accordingly for higher profits. To realize this potential, a concerted effort must be made to move the bulk of inefficient and underperforming farms closer to the existing efficiency frontier. This is a realistically achievable goal, as technical efficiency is measured relative an actual frontier that already exists today in the Belarusian agriculture, and not relative to some theoretical construct. Genuine managerial efforts and meaningful internal restructuring of farm enterprises, far beyond mere formal reorganization, are the major ingredients necessary for achieving this goal. A similar analysis was carried out to estimate the technical efficiency of private farms compared with large farm enterprises (with both reorganized and non-reorganized enterprises pooled into one group). Due to data limitations, the analysis was carried out only for 1998, and output in constant prices was replaced with output in current prices. The input variables matched those used for farm enterprises in Set 1 (agricultural land, number of animals, number of workers, and cost of purchased inputs). Table 4.11. Technical Efficiency Scores of Individual Farms and Farm Enterprises for 1998 (Data Envelopment Analysis with variable returns to scale) Individual farms (n=22) Farm enterprises (n=8 1) Average DEA scores 0.54 0.58 Western experience suggests that individual family farms should be more efficient than collective or corporate farm enterprises. The socialist tradition, on the other hand, believes in economies of scale and thus claims that large farm enterprises are inherently more efficient than small individual farms. The results of technical efficiency analysis do not support either point of view at this stage. Both small individual farms and large farm enterprises had efficiency scores of 0.5-0.6 relative to the production frontier derived using Data Envelopment Analysis (Table 4.11). The difference between the technical efficiency scores is not statistically significant. The empirical evidence from the survey does not support the view that individual farms achieve higher efficiency levels than farm enterprises. Yet perhaps the major achievement of this analysis is to show that large farm enterprises do not have a measurable efficiency advantage either. The policy environment in Belarus favors large farm enterprises and discriminates in various ways against individual farmers. Therefore, the "neutral" result of our technical efficiency analysis suggests that individual farms would prove to be more efficient than large enterprises if an even playing field were provided for farms of all organizational forms. 5. Financial Performance of Farms Farm enterprises, like any legal entity in Belarus, routinely prepare annual financial statements, which are used by management for decision making and are submitted to the Ministry of Agriculture for monitoring and statistical data collection. Based on these financial statements, the managers of reorganized and non-reorganized farms participating in the survey provided detailed financial information for two years, 1995 and 1998. This information made it possible to apply standard tools of financial ratio analysis to assess the financial situation of farm enterprises and estimate its change between two time points. Unfortunately, such quantitative information was not available for private farmers or employee households. Partial financial results for private farms are reported to the extent that appropriate data were provided by the survey. Throughout this chapter, the financial ratios are calculated from data that have been pooled for all 81 farms in the sample, or for all farms in each of the two categories of reorganized and non-reorganized farms (48 and 33 farms, respectively). This approach produces so-called weighted-average ratios, rather than the simple arithmetic averages (means) of the corresponding ratios. The simple arithmetic average of farm-by-farm ratios attaches equal weights to the results for large and small farms. In the weighted-average calculation, on the other hand, the results of large farms carry a greater weight than the results of small farms. Instead of representing the mean ratio across all farms, large and small alike, the weighted average represents the ratio for the entire group of farms pooled together. The values of weightedaverage and mean ratios are generally different, and it is important to use them consistently in order to preserve comparability. The weighted-average approach has been chosen for this chapter because calculation of individual ratios for each respondent farm usually produces very high variability and leads to unreliable means with very large standard deviations. The shortcoming of the weighted-average approach is that it precludes estimation of statistical significance of the differences between the two categories of reorganized and non-reorganized farms. 5.1. INDEBTEDNESS AND LIQUIDITY Structure of Assets and Liabilities The financial sources in the balance sheet of farm enterprises are predominantly equity, with outside liabilities (debt and accounts payable) accounting for less than 10% of the total balance (Table 5.1). This seemingly very healthy structure of the farm balance sheet is unfortunately a technical artifact: farm assets in Belarus are revalued periodically to compensate for the erosion of historical value in an inflationary environment. Any upward adjustment in the value of assets is automatically reflected in an addition to equity in the form of revaluation 65 66 Chapter Five: reserves: this is essential to ensure that the two sides of the balance sheet continue to balance after asset revaluation. The increases in equity thus do not reflect accumulation of new profits or injection of new capital by shareholders: these are technical increases in the book value of assets that do not contribute any cash or liquid funds to farm operations. There is no guarantee that the farrn assets actually can be sold at their adjusted book value, or that this book value is even close to the replacement value of new assets. As a result, farm equity contains a very large illiquid component whose practical value for survival is doubtful. Table 5.1 Average Balance Sheet Structure of Reorganized and Non-Reorganized Farms (in percent) 1995 1998 Reorganized NonAll sample Reorganized Nonfarms reorganized farms reorganized farms farms All sample Assets 100 100 100 100 100 100 Fixed assets 71 77 73 59 61 60 Current assets 29 23 23 41 39 40 Inventories 19 19 19 31 33 32 Accounts receivable 3 2 2 2 1 1 Equity and liabilities 100 100 100 100 100 100 E.quity 94 94 94 88 90 90 Long-term loans 1 1 1 1 1 1 C'urrent liabilities 5 5 5 10 8 9 Short-term loans 1 1 1 1 1 1 Accounts payable 4 5 4 8 6 7 The practice of adjusting the historical cost of assets for inflation was introduced in Belarus in 1995 for fixed assets only (buildings, machinery, and equipment). In the 1995 balance sheet, the first balance sheet to include revaluation of fixed assets, the revalued fixed assets account for over 70% of total assets (Table 5.1), which represents a very substantial upward adjustment in the proportion of assets in the balance sheet (prior to that, the proportion of fixed assets had been eroded by inflation to less than 20% of total assets). Between 1995 and 1997, yearly revaluations of fixed assets were performed, while current assets (cash, accounts receivable, inventories) continued to be reported at their actual purchase cost. Because of very high rates of inflation, this practice produced gross undervaluation of the inventories component of current assets and led to reporting of fictitious inflationary profits. With inflation running at 20%-30% per month, stocks of inputs purchased as recently as three months ago would be eroded to a fraction of their real value by December 31. The corresponding component of input use in production costs would be much lower than it should be, artificially inflating the reported profit. Since 1997, the farm enterprises (as all other legal entities) revalue the inventory component of current assets by indexing the original cost to inflation. The observed shift in the proportion of fixed assets and inventories in the farm balance sheet between 1995 and 1998 is a reflection of these changes in accounting practices: revaluation of inventories in 1998 increased their proportion to over 30% of total assets, while at the same time automatically reducing the proportion of fixed assets (whose revaluation simply continued as in previous years). 67 Financial Performance of Farms Other than these relative shifts in fixed and current assets, the structure of the farm balance sheet remained largely unchanged between 1995 and 1998. Moreover, there are no significant differences between the balance sheets of reorganized and non-reorganized farms in either year. Table 5.1 shows that the current assets of farms exceed not only their current liabilities, but even their total liabilities (including the small component of long-term loans). Farms thus operate with a positive net working capital. However, most of the current assets are inventories, which are generally difficult to convert into cash. The amount of relatively liquid financial assets, such as accounts receivable, is insufficient to cover the liabilities. Another feature of the farm balance sheet is the negligible role of loans (both long and short term) in the financing mix of the farms. Accounts payable, i.e., supplier credit and not bank credit, constitute the main component of farm liabilities. The share of accounts payable in total liabilities is increasing over time (Table 5.1). The structure of accounts payable shown in Figures 5.1a-5.1b reveals a strong increase in the role of suppliers, i.e., trade credit, in the financing mix of farm enterprises. The share of suppliers in accounts payable went up from 46% in 1995 to 70% in 1998, while obligations to the government (various unpaid taxes) and payroll arrears were and remain relatively small. Again, there are no marked differences between reorganized and non-reorganized farms in this respect. Fig. 5.1a. Structure of Accounts Payable: 1995 Fig. 5.1b. Structure of Accounts Payable: 1998 Suppliers Suppliers 7% 46% Govemment 7% 12% Payroll 18%OteParl 30% Goverment 9% Current Assets and Liquidity The ability of a firm to repay its short-term obligations is usually measured by a number of ratios that show to what extent the current, relatively liquid assets are sufficient to cover the current liabilities. Such current ratios are presented in Table 5.2. The standard current ratio, calculated as the ratio of all current assets (inventories, accounts receivable, and cash) to current liabilities, confirms the previous conclusion, namely that current assets exceed current liabilities, and that by a very healthy margin. Yet a large part of the current assets are the illiquid inventories, and as we see from the ratio of inventories to current liabilities in Table 5.2 they are largely responsible for the high value of the current ratio. Eliminating the inventories from the current-asset base available for immediate repayment of liabilities, we calculate the so-called acid (or quick) ratio as the ratio of liquid financial assets (mainly cash and accounts receivable) to current liabilities (Table 5.2). 68 Chapter Five: Table 5.2 Current Ratios for Reorganized and Non-Reorganized Farms Reorganized farms 1995 Nonreorganized All sample Current ratio: current assets to current liabilities 3.91 3.49 Inventories to current liabilities 3.19 Acid ratio: current assets without inventories to current liabilities Receivables to payables Ratio Reorganized farms 1998 Nonreorganized All sample 3.79 4.71 3.06 4 16 3.07 3.16 4.35 2.77 3.82 0.71 0.42 0.63 0.36 0.28 0.34 0.48 0.43 0.47 0.19 0.15 0.18 The acid ratio is clearly less than 1, which means that the liquid assets (excluding inventories) are insufficient to cover the current liabilities. This in itself is not critical, as a similar pattern is observed virtually for all firms in market economies. A worrying sign, however, is the marked decline of this acid ratio between 1995 and 1998. It dropped from 0.6 to 0.3 during this period for all the farms surveyed, which points to a substantial decline in the ability of the farms to repay their current obligations from liquid assets. A similar pattern is suggested by another current ratio which measures the firm's ability to repay its accounts payable (a subset of current liabilities that excludes banks) from its accounts receivable, i.e., nmoneyowed by the buyers of its products and services. Here also the receivables are insufficient to cover the payables, and the ratio declined sharply between 1995 and 1998 (Table 5.2). Thus, the two ratios that measure the liquidity of the farms, i.e., their ability to repay their current debt from liquid assets, clearly show that the financial situation of the farms deteriorated during the last few years. Table 5.3. Structure of Accounts Receivable of Agricultural Producers in 1998 (in percent) Debtor Reorganized farms Non-reorganized Private farms Commercial firms and private traders 34 5 32 Food processors 19 20 n.a. Central government 17 10 n.a. State procurement agency 14 33 4 Local governments 0 4 n.a. Other enterprises for goods and services 8 22 62 Private farmers 5 0 n.a. Others 3 6 3 Total 100 100 100 16,582 7,297 34 Million rubles Table 5.3 presents information about accounts receivable, i.e., the amounts owed by various clients to agricultural producers. The structure of receivables follows the pattern of the marketing channels used by agricultural producers. Reorganized enterprises have most of their claims on commercial firms (34% of the total) and the government is their second largest debtor (31%). Non-reorganized farms typically carry receivables from state procurement agencies and 69 Financial Performance of Farms central government (43% of total). The share of food processors and other enterprises in accounts receivable is 20% for both types of farm enterprises. Over 60% of private farmers' receivables is from other enterprises (which include, among others, state procurement and processors) and the rest is mainly from commercial firms or traders (32%). Debt and Sales We have so far assumed that debt is repaid from stocks of liquid assets. An alternative view assumes repayment of debt from current cash flows. It is basically the cash flows generated by profits that are used to repay debt, but a practical measure of debt repayment capacity is the ratio of debt to sales. The value of this ratio is the number of years it will take to repay the debt if all sales revenues are used for this purpose. The ratio of total liabilities to sales is shown in Table 5.4. The indebtedness levels are not critically high: in 1995 the farm debt could be repaid with 2.5 months of sales, and in 1998 it could be repaid with 4 months of sales. These are comfortably acceptable debt levels, but again the trend gives reason for concern: the ratio of debt to sales increases over time, which means that either debt is growing too fast or sales are growing too slowly. These are additional signs of deteriorating financial situation. Table5.4. TurnoverandTotalIndebtednessRatios:1995-1998 Ratio 1995 NonReorganized farms reorganized All sample 1998 NonReorganized farms reorganized All sample Sales to total assets 0.34 0.28 0.32 0.36 0.29 0.35 Total liabilities to sales 0.18 0.25 0.20 0.25 0.47 0.30 Both lack of liquidity and insufficient capacity to repay outstanding debt are usually signs of inability to generate sales and profits. The ability of farms to generate sales from their assets did not change between 1995 and 1998. At both times, each unit of assets (fixed and current combined) generated slightly over 0.3 units of sales (Table 5.4). This ratio did not decline over time, which means that there has been no deterioration in the operating efficiency of the farms. Yet the absolute value of this ratio is abysmally low by the standards of Western agriculture, where each unit of assets typically generates one unit of sales, or even more. The financial evidence thus seems to indicate that, by international standards, Belarusian farms generate sales at a very low rate. Farm Profitability Despite the low sales-generating capacity and the deteriorating financial indicators, most farms surveyed report a profit. Nevertheless, the number of farms reporting losses in the sample increased sharply from 2 in 1995 to 20 in 1998, or 25% of those surveyed (Table 5.5); this percentage of unprofitable farms in the sample is consistent with the national percentage of farms reporting losses in 1998 - see Chapter 2, Sec. 2.2). The losses of the unprofitable farms in the sample were more than compensated by the profits of the profitable farms, and the average Chapter Five: 70 profitability for the entire sample of 81 farms remained positive (this result also holds for the subsamples of reorganized and non-reorganized farms). Overall, the profitability level as measured by the ratio of gross profit to sales declined between 1995 and 1998 (Table 5.5). The decline affected both reorganized and non-reorganized farms, and the gap between the two groups of farms remained unchanged: the reorganized farms had higher profit margins in both periods. This may in part be due to the higher share of nonagricultural activities in the portfolio of reorganized farms, as these activities are less subject to government price controls and are therefore generally thought to be more profitable than primary agriculture (Table 5.6). Both higher profit margins and greater involvement in non-agricultural businesses is a feature that reorganized farms had already in 1995: it is part of the difference in the initial conditions, anclnot something that evolved dynamically over time. Table5.5. Numberof FarmsReportingLossesand ProfitMargins(percentof sales) 1998 1995 Reorganized NonAll sample farms reorganized Reorganized Nonfarms reorganized All sample Farms reporting losses I 1 2 13 7 20 Total number of farms 48 32 80 48 33 81 Percent of farms reporting losses 2 3 3 27 22 25 Gross profit as percent of sales 21 13 19 16 7 14 Table 5.6. Structure of Sales 1995 NonReorganized Farms reorganized 1998 All sample Reorganized NonFarms reorganized All sample Total sales revenue 100 100 100 100 100 100 Crop sales 27 31 28 25 36 27 Livestock sales 48 68 53 50 54 51 Sales of non-agricultural activities 27 9 19 22 10 22 5.2. FINANCIAL GROWTH The survey provided financial data of farm enterprises at two time points, 1995 and 1998, and these data could be used to estimate the growth in various components over time. Because of galloping inflation between 1995 and 1998, the 1998 values were converted to 1995 values by applying the change in the Consumer Price Index, which increased from 1 in 1995 to 6.272 in 1998. The CPI-deflated numbers were then used to calculate the real change between 1995 and 1998. The results are summarized in Table 5.7. For the entire sample of 81 farm enterprises, the sales volume increased in real terms by 7% between 1995 and 1998. Yet the profits dropped by 20% in the same period, presumably because of the more rapid increase in production costs due to unfavorable terms of Financial Performance of Farms 71 trade in agricultural products and inputs (see Chapter 1). The declining profits reduced the funds available for internal financing and forced the farm enterprises to finance their operations through borrowing. The total liabilities accordingly increased by nearly 60% in real terms between 1995 and 1998. Nationally, the increase in debt was even greater than for the farms surveyed: averaged over all 2,500 Belarusian farm enterprises, the debt per farm grew in real terms by 80% between 1995 and 1998. Since the increase in current liabilities (mainly suppliers credit represented by accounts payable) lagged behind the overall growth in total liabilities in the farms surveyed, the balance was made up by a faster increase in long-term liabilities, which became available from government sources in recent years. The accumulation of debt in farm enterprises is determined by two factors: low profitability (as measured by the ratio of profits to sales) and low efficiency of asset utilization (as measured by the ratio of output to total assets). Regression analysis based on 1998 data shows that the level of indebtedness increases when farm profitability declines and when farms operate their assets less efficiently. The dependence of debt on measures related to land and labor is not statistically significant, i.e., farm size is not a determinant of indebtedness. The formal analysis thus corroborates an intuitively obvious result: less profitable and less efficient farms have higher indebtedness. Table5.7Changesin Real Valueof MajorBalanceSheetComponentsfor ReorganizedandNon-Reorganized FarmsBetween1995and 1998(percent) Reorganized farms Non-reorganized farms All sample Profits -15.3 -41.6 -20.4 Sales 14.7 -14.4 7.4 Total assets Fixed assets 1.3 -18.8 -13.4 -31.8 -2.8 -22.6 Currentassets 57.4 36.4 51.6 Inventories 77.6 40.7 67.0 Financial current assets -33.5 5.2 -25.8 Accounts receivables -44.0 -45.6 -44.5 Total liabilities 47.9 75.6 56.1 Current liabilities 30.7 55.7 38.1 Accounts payable, total 40.8 57.5 46.2 Note: Real values obtained by deflating the nominal data to 1995 price level: CPI change from 1995 to 1998 = 6.272 Any growth in sales volume automatically leads to an increase in inventories and accounts receivable as the components of current assets. In Belarusian agriculture, inventories indeed increased, but at a much faster rate than sales. This points to undesirable effects of overproduction and buildup of unsalable inventories. Accounts receivable, on the other hand, declined in real terms, probably because an increasing portion of sales began to flow through demonetized barter transactions, which contribute to accounting revenue but not to the cash reserve represented by future collection of accounts receivable. Because of declining profits and growing liabilities, farm enterprises cannot allocate funds to replacement and renewal of fixed assets. The existing stock depreciates in the process of 72 Chapter Five: normal wear-and-tear, and lack of cash for the purchase of new assets is reflected in the steep decline of the real value of fixed assets between 1995 and 1998. The pattern of growth between 1995 and 1998 reveals some differences between reorganized and non-reorganized farms. Sales increase fairly strongly in reorganized farms and declined in non-reorganized farms; as a result the decrease in profit was much greater in nonreorganized farms, and their indebtedness, as represented by total liabilities, grew much faster than in reorganized farms. The more severe shortage of funds in non-reorganized farms precluded replacement of fixed assets and produced faster erosion of their stock due to normal weak-and-tear. Thus, the reorganized farms starting from a healthier base in 1995 continued to perform better than he non-reorganized farms, which were already weaker in 1995. "The rich got richer, and the poor got poorer." 5.3 FARM FINANCING AND CREDIT SYSTEM All farm enterprises, both reorganized and non-reorganized, resort to credit for financing their operations. The average borrowing in 1998 was 17.5 billion ruble per farm, or about 25% of annual sales. The reorganized farms as a group appear to be borrowing more: the volume of 1998 borrowing for reorganized farms reached 28% of sales, while the non-reorganized farms borrowed only 12% of sales. Table 5.8. Structure and Sources of Farm Credit in 1998 Borrowing in 1998, billion nible per farm Reorganized farms Non-reorganized All sample 20.3 15.0 17.5 Borrowing as percent of annual sales 28 12 Structure of borrowing (in percent of total volume of credit in 1998): 25 Cash credit 36 73 40 Commodity credit 64 27 60 Sources of cash credit (in percent of the volume of cash credit in 1998): Government 13 19 National Bank 27 40 14 30 Commercial banks 58 40 55 Other 2 0 1 Farm enterprises receive credit in two main forms: cash credit, mainly from commercial banks and the National Bank of Belarus, and commodity credits in the form of physical supplies of fertilizer, chemicals, fuel, and other farms inputs (Table 5.8). Overall, 40% of 1998 borrowing was in cash form and 60% in commodity credits. There is, however, a significant difference in the structure of credit between reorganized and non-reorganized farms. Reorganized farms rely more on commodity credit and less on cash loans (over 60% of their borrowing is represented by commodity credits), while non-reorganized farms report much smaller reliance on commodity credits (less than 30% of 1998 borrowing). The reason for this finding is not clear. Financial Performance of Farms 73 Cash credit is provided mainly by commercial banks and to a lesser extent by the government through the National Bank. Some direct credit provision by the government is also reported (Table 5.8). However, even borrowing from commercial banks may in part be directed by the government or the National Bank, which provide earmarked funds for on-lending to agriculture. The borrowing from the National Bank and the government is mainly for terms of one year and longer (up to 10 years in some cases), while the borrowing from commercial banks is short-term, mainly for 10 months and less (Figure 5.2). The annual interest rate on cash loans ranges from 5% to 80%, and commercial banks are not reported to charge higher interest rates than state sources. Both the mean and the median interest rate for the three sources is between 20%-25% per annum, which is far below the annual inflation rate in Belarus in 1998. Farm enterprises thus benefit from a substantial implicit interest-rate subsidy on their borrowing. It is difficult to determine the structure of commodity credits, as farms reported the breakdown by specific farm inputs for less than 15% of the total amount: the remaining 85% of commodity credits is unaccounted for in the survey. Fuel appears to be the main input used for commodity credits: it represents over 70% of the amounts accounted for by the respondents. Fig. 5.2. Term Structure of Loans from State and Commercial Sources 100% 80% _ 12mo. 60% _Over 40% _ tolOmo. The purpose of commodity credits is to satisfy seasonal working-capital 20% requirements. Tee are appropriately short-term credits 0% extended for periods of up to 9 Government National Bnk Commercial bnks months. The state and state procurement organizations (state-controlled marketers of farm products) are the main reported source for most commodity credits (70%-80% of the respondents identifying the source of each farm input in the commodity credit program). Regional authorities (raion and oblast government organs) are the only practical alternative to central state sources, and they are a distant second, reported as the source of commodity credits by 10%-15%of respondents. Fuel is the only farm input which is reported to be supplied by commercial suppliers as part of commodity credit arrangements (22% of respondents). While all farm enterprises use credit, borrowing among private farmers is much more restricted: only 60% of private farmers actually took loans in 1998. The median loan was around 500 million ruble, which is large compared to median sales of 800 million rubles in 1998. This level of borrowing is certainly higher than the borrowing of farm enterprises relative to their sales (see Table 5.8), which highlights the importance of access to credit for private farmers. The median interest rate for private farmers is close to that for farm enterprises, 26% annually, which is far below the annual inflation rate in 1998. The borrowing is mainly for terms longer than I year (the exact term is not specified in the survey instruments). Virtually the only reported source of credit for private farmers is the government: all farmers who borrowed in 1998 received credit 74 Chapter Five: from the government. Access to other sources of credit, such as commercial banks or private lenders, is negligible. Curiously, private farmers in Belarus do not report any borrowing from friends and relatives, which are typically a reliable source of informal credit for individual borrowers in other CIS countries. Practically all managers and all private farmers who borrow report that they do offer collateral for their loans. Land cannot be used as collateral, as it is prohibited to mortgage stateowned land given in use rights. Farm machinery and buildings, on the other hand, are offered as collateral by about 20% of managers and by all private farmers. The most popular forms of security among farm enterprises are animals (over 90% of respondents), as well as future crop and existing inventories (over 40% of respondents). These forms of collateral are also reported by about 15% of private farmers. Government subsidies are an additional source of revenue for agricultural producers. Almost 90% of managers surveyed report that they receive at least some form of government support (Table 5.9). The most common forms of government support reported by 50%-60% of managers include producer subsidies compensating for low product prices and high input prices (which are set by government controls, and not by market forces), as well as subsidized credit. Debt write-offs and rescheduling are mentioned by 16% of farm managers. Yet this instrument seems to be exclusively a feature of subsidized credit: practically all managers reporting debt write-offs also report access to subsidized credit. Subsidized credit programs produce moral hazard and bailout mentality everywhere in the world, and Belarus managers are not exempt from this behavioral rule: if the government gives subsidized credit, then surely the government does not expect it to be repaid. This kind of attitude automatically leads to a vicious circle of self-fulfilling expectations, establishing a close association between subsidized credit programs and nonpayment. Table5.9. ProducersReportingDirectGovernmentSupport (percentof respondents) Reorganized farms Nonreorganized Some kind of government support 92 Subsidized credits All farm enterprises Private farms 85 89 53 60 52 57 27 Debt write-offs 15 18 16 0 Producer subsidies compensating for low product prices 46 52 48 0 Producer subsidies compensating for high input prices 63 67 64 30 Tax credits 17 21 19 17 Milk subsidies ("compensation for unfavorable natural conditions") 6 15 10 0 The eligibility for subsidies among private farmers is substantially lower than among farm enterprises: only about 50% of the private farmers surveyed report that they receive some form of government subsidy, compared with 90% for farm enterprises (Table 5.9). About 30% of private farmers receive compensation for high input prices and subsidized credits, again much below the 60% rate for farm enterprises. This is a clear manifestation of the "uneven playing _75 Financial Performance of Farms field" that the government has created for private farmers, contradicting the declared policy that all organizational forms in agriculture are equal. While providing some benefits through subsidy and support programs, the government also extracts rent from agriculture by taxing producers directly (in the form of taxes on land, labor, and profits) and indirectly (through procurement quotas and price controls). The net effect of these policies on agricultural producers is a priori unclear, and the farm survey helped clarify the perceived situation. The overall perception among producers (both managers of farm enterprises and independent private farmers) is that the taxes they pay overweigh the subsidies they receive. This was the answer that three-quarters of respondents in all categories gave to a direct question asking them to compare the total amount of taxes they paid to the total amount of government subsidies they received in 1998 (Table 5.10). Table 5.10. Producers' Assessment of the Total Amount of Taxes Paid Relative to the Total Amountof SubsidiesReceivedfrom the Government(percentof respondents) Reorganized farms Non-reorganized farms All farm enterprises Private farmers More taxes paid than subsidies received 73 72 73 77 Less taxes paid than subsidies received 8 19 12 12 Taxes paid are equal to subsidies received 19 9 15 12 Managers and private farmers have practically the same views of the future financial situation of their farms. About one-quarter of respondents believe that the situation will improve, another 15% do not expect any change, and about 30% expect the financial situation to deteriorate (Table 5.11). A large proportion of respondents are undecided about the future, and as a result the views expressed in the survey do not provide conclusive evidence of either pessimistic or optimistic expectations. It is only clear that the producers do not expect a major disaster; yet on the other hand they do not expect any breakthroughs either. Table5.11 Expectationsaboutthe FutureFinancialStatusof the Farm Reorganized farms Non-reorganized farms All farm enterprises Private farms Better 27 27 27 23 Unchanged 15 18 16 17 Worse 27 36 31 27 Undecided 31 18 26 33 Planning of major investment projects is a good indicator of confidence in the farm's future. Farm-enterprise managers and private farmers are brimming with proposals for investment projects to be carried out in the next two-three years. About 90% of respondents have plans for some farm investments in the immediate future (Table 5.12). The most popular investment is purchase of farm machinery (over 85% of respondents among managers and private farmers). This option is followed by construction of farm buildings and improvement of the livestock herd, which are listed by more than 50% of respondents in all categories. Purchase of processing equipment and planting of new orchards trail as a third priority. 76 Chapter Five: Table 5.12. Investment Plans for the Near Future (Next Two-Three Years) Investment project Reorganized Non-reorganized farms farms Intend to make some investment 81 94 Purchase farm machinery 81 94 All farm enterprises Private farms 86 90 86 87 Purchase livestock 48 58 52 60 Construct farm buildings 48 52 49 83 Plant orchards 15 6 11 40 Purchase processing equipment Other farm investments 19 18 19 47 10 9 10 40 Table 5.13. Financing Mix for Investments in Farm Enterprises (percent of managers) Investment project Own funds Bank loans Govemment Purchase farm machinery 14 64 13 Other loans 9 Purchase livestock 36 43 21 0 Construct farn buildings 28 50 20 2 Plant orchards 45 22 33 0 Purchase processing equipment Other farm investments 13 60 20 7 37 38 25 0 Average frequency score 29 46 22 3 The projected 75 billion rubles. from banks the investment. need for investment Most managers (Table 5.13), funds are proposing although among about 30% More than 20% of managers indicate the necessary investment funds from central provide Among investment private farmers, with a mixture from own loans to cover funds, and nearly of equity 60% and bank the remaining 10% farm-enterprise to raise of loans, the necessary plan to use that they resources. own managers financing capital are expecting the is on average by borrowing to pay for government the to respondents about are planning to finance their 30% intend to finance the investment optimistically believe that they will be able to raise Half the private farmers made an effort to estimate the required investment and even the expected return on investment. The numbers vary widely, probably because of the uncertainty introduced in the monetary scale of reference of the respondents by so-called "denominations" that periodically drop a number of zeros from the inflated currency. It is meaningless to try and calculate the mean investment and the mean return under these conditions. The median values are more robust in such a situation, and the data give 100 billion rubles as the median investment requirements that are expected to produce a median net return of their entire 10 billion requirements investment rubles. needs. These numbers look grossly exaggerated compared enterprises (75 billion ruble on average). It is possible farm-enterprise economists and accountants gave the numbers in "denominated" rubles, the financially less sophisticated private farmers estimated their investment needs in rubles. In this event, the amounts reported by private farmers should be slashed by a factor giving 10 billion rubles as the estimated investment requirements per private farm. investment of farm to the that while "old" of 10, Financial Performance of Farms 77 Based on the median values for investments and returns in private farms, the expected rate of return on investment is 10%. Full calculations produce rates of return that vary in a reasonably tight range between 5% and 50%, with a mean of 15%. However reasonable these numbers look, they are all much less than the annual rate of inflation, and the farmers' expectations are thus equivalent to net loss in real terms. 6. Market Support Services: Product Sales and Input Supply Systems The previous chapters had an inward orientation, focusing on changes that occur inside the farms. We have discussed changes in allocation of land, production and productivity, labor relations, and finally the financial results. Yet the success of the farming sector in a market environment depends on availability of non-monopolistic market support services that enable the farms to sell their output and purchase the required inputs at competitive prices. Socialist agriculture was characterized by state-controlled marketing and supply monopolies. The findings reported in this chapter indicate that, after a decade of transition, the main marketing and supply channels accessible to agricultural producers in Belarus remain under state control. 6.1. PRODUCT MARKETING SYSTEMS During the Soviet period, commercial production was concentrated in large-scale farm enterprises, while household plots produced mainly for own consumption. Today, commercial producers include two groups of farms: the large farm enterprises and the smaller independent farms, all of which report commercial sales of farm products. Employee households also exhibit substantial commercial orientation, with fully 75% of respondents in this category reporting some sales from their household plots. Farm enterprises sell over 90% of the output of most commodities they produce, and private farmers are not far behind, with sales exceeding 80% of the volume of production, although for a much more restricted range of products (Table 6.1, Figure 6.1). Only grain, potatoes, and vegetablesare used in any significant Fig. 6.1. Commercializationof AgriculturalProducers percentof respondents 100 80 _ 0 _Farm enterprises farms Private 0 MHouseholds 40 _ quantities for internal purposes in these 0 enterprises: all farm commodities are distributed in one 20 form or another to employee households, while grain in particular Shareof outputsold 0 Farmsreportingsales is used as feed for animals. The level of commercialization of household plots is much lower: only three-quarters of household plots report commercial sales, and these sell on average about 20% of their output (Figure 6.1). Farm enterprises are clearly the backbone of commercial production in Belarus, as the absolute quantities they sell are orders of magnitude 79 80 Chapter Six: greater than the quantities sold by independent farms or employee households (Table 6.2). Farm enterprises obviously remain the main suppliers of food commodities to the population, primarily through state-controlled distribution channels. It is perhaps curious to note that practically none of the producers participating in the survey sell eggs. This is consistent with the previous finding (see Chapter 4) that very few farm enterprises and private farms keep chickens. Eggs and poultry meat are probably supplied to the population by specialized "chicken factories" that were not included in the survey. Table 6.1. Commercial Sales of Farm Products: Farms Reporting Sales and Share of Output Sold Percent of respondents reporting sales Percent of output sold Farm enterprises Independent farms Employee households Farm enterprises Independent farns Employee households Grain 99 83 2 59 73 65 Sugar beet 43 -- -- 91 -- -- Oilseeds 46 -- -- 94 -- -- Flax 38 -- -- 97 -- -- Potatoes 93 50 37 60 66 28 Vegetables 17 17 6 72 91 36 Fruits 21 -- 5 94 -- 53 Meat 99 30 23 96. 88 40 Milk 99 10 57 89 83 40 Eggs -- -- 4 -- -- 36 Table 6.2. Commercial Sales of Farm Products: Quantity Sold Per Farm (ton) Percent of respondents reporting sales Farm enterprises Independent Employee farms households Quantity sold per farn, ton Farm enterprises Independent farms Employee households 0.6 Grain 99 83 2 1,300 70 Sugar beet 43 -- -- 4,300 -- -- Oilseeds 46 -- -- 76 -- -- Flax 38 -- -- 124 -- -- Potatoes 93 50 37 360 72 1.6 Vegetables 17 17 6 610 54 0.4 Fruits 21 -- 5 142 -- 0.5 Meat 99 30 23 520 6 0.15 Milk 99 10 57 2,100 9 1.4 Eggs (thousand pieces) -- -- 4 -- -- 40,000 State procurement is the dominant marketing channel for farm enterprises, which sell more than 60% of their output to the state. The individual sector is also heavily dependent on state marketing channels, which absorb more than 50% of sales from independent private farms and more than 20% of sales from household plots (Table 6.3). Both private farmers and Farm Input Supply and Food Marketing Systems 81 household plot operators are beginning to make use of wholesalers and other marketing intermediaries. Somewhat surprisingly, private farmers do not sell directly on the market or on the roadside to final consumers: this channel is used exclusively for products from household plots. Another unique feature of household plots is their reliance on the local farm enterprise as a sales outlet for their products: more than one-third of household plot sales are channeled through the parent farm enterprise (Table 6.3). Table 6.3. Structure of Marketing Channels for Farm Products (percent of output sold through each channel) Farm enterprises Private farms State procurement 61 54 Processing industry 22 10 Farmers' market 3 6 Directly to consumers 4 0 Sales through middlemen 3 30 14 Other channels 6 0 3 NA NA 35 Sales to local farm enterprise Household plots 27 Table 6.4. Difficulties Experienced by Producers with Marketing of Farm Products (multiple answers allowed) Percent of respondents reporting sales Specific difficulties (percent of respondents reporting commercial sales) Low prices Administrative Delays in Delivery to No restrictions payments market difficulties Farm Enterprises Grains 99 70 16 11 0 25 Sugar beets 43 43 3 6 0 57 Oilseeds 46 30 3 5 0 68 Flax 38 58 3 13 8 29 Potatoes 93 41 17 8 1 43 Meat 99 81 24 15 0 15 Milk 99 79 20 15 0 19 Private Farms Grains 83 72 8 20 0 20 Potatoes 50 40 20 13 0 33 Meat 30 22 22 11 0 67 Employee Households Potatoes 37 39 3 10 28 37 Meat 23 52 13 12 8 40 Milk 57 68 5 13 2 30 Low prices received for farm products is the only consistent complaint among all producers reporting substantial sales of their output. This complaint is reported for a wide range of products sold by farm enterprises, and also for a more limited range of farm products that are 82 Chapter Six: sold commercially by a sufficiently large proportion of private farmers and household plots (Table 6.4). Other potential problem areas, such as transport and delivery to markets, delays in collection of payments from customers, or various administrative regulations and licensing restrictions, are generally not identified by any of the producers as actual difficulties to sales of farm products. On the contrary, a substantial percentage of producers in all three categories farm enterprises, private farms, and household plots - do not report any specific difficulties in their endeavors to sell farm products (Table 6.4). Since most commercial sales are channeled through state procurement organizations and state-controlled processors (see Table 6.3), the prevailing complaint about low prices for farm products may be a reflection of the government's policy to fix the procurement price at a level unsatisfactory to producers. Indeed, most farm-enterprise managers and independent farmers identify the government as the main agent responsible for the determination of prices of farm products (Table 6.5). Independent farmers, who deal with alternative market agents more frequently than farm-enterprise managers (see Table 6.3), assign greater importance to market forces, traders, and consumers in the process of price determination. Yet even they acknowledge that the government is the main force determining the prices of farm products. It should be noted, however, that complaints about low product prices emerge as the main marketing difficulty for producers in World Bank surveys in all former Soviet republics, including those with a much lower level of government intervention in procurement and pricing than Belarus. The persistent complaints about low prices are probably a reflection of the generally low profitability of agriculture associated with relatively high prices of manufactured inputs and insufficient productivity. Artificially depressed prices of farm products in Belarus are just one component of a complex picture of inadequate profitability, and their impact is not fully offset by the subsidies to producers (see Chapter 5). Table 6.5. What Institutions Determine the Prices of Farm Products (percent of respondents) Managers of farm enterprises Private farmers Government 93 80 Market forces 44 73 Wholesalers and intermediaries 12 44 Consumers 22 73 Note: Percent of respondents reporting that the specific institution plays a dominant or an important role in price determination; multiple answers requested. State Orders for Farm Products The government maintains a national food fund and regional oblast-level food funds, which serve to supply the population with food commodities at controlled prices through centralized distribution channels. These food funds are maintained and replenished through the mechanism of procurement quotas, which are imposed on agricultural producers and are reflected in their sales to state procurement organizations. All farm enterprises are subject to obligatory deliveries to state procurement agencies. The procurement quotas for farm enterprises cover all the major crop and livestock products, without exception (Table 6.6). Even potatoes, vegetables, and fruits (which officially have been "liberalized") are reported to be subject to state 83 Farm Input Supply and Food Marketing Systems procurement orders, and 100% of farm enterprises selling these commodities in fact must fulfill state orders. Private farmers are not exempt from procurement quotas either. Overall, more than half the farners report that they are obliged to fill state orders, and the state orders are imposed on grain only: other commodities produced by private farmers are generally not subject to state procurement quotas. Overall, 90% of private farmers are grain growers (see Table 4.1), but in general it is the larger private farmers (those producing on average 100 tons of grain) that are subject to state orders. The smaller grain producers are still exempt from state orders. Table6.6. Incidenceof ProcurementOrders(percentof respondents) Farmenterprises Privatefarms 100 57 Grain 94 50 Sugar beet 36 -- Oilseeds 41 -- Flax 41 -- Potatoes 64 Vegetables 17 -- Fruits 9 -- Meat 96 -- Milk 99 Farms subject to procurement orders Commodities subject to procurement orders: The practice of selling to the state is much broader than what is prescribed by state orders. Thus, among private farmers, 57% are subject to state orders, yet 77% report sales of various farm commodities (and not only grain) to the state. This is understandable in a system dominated by state marketing organizations and characterized by undeveloped alternative distribution channels (see Table 6.3). The official view of incentives for selling to the state - in fulfillment of state orders or from other considerations - emphasizes access to inputs and credit. This view is expressed by the policymakers represented by government officials in the capital. (Table 6.7). The reality as expressed by farm-enterprise managers is different. Sales to state procurement channels do not entail any special benefits to producers other than the fulfillment of a legal obligation (Table 6.7). The prices paid for state orders are not higher than market prices, and farms fulfilling their procurement quotas are usually not entitled to receive inputs or preferential credits from the government. Commodity credit schemes that promise delivery of farm inputs in exchange for food products play a marginal role. Private farmers mainly expect that selling to the state will enable them to maintain good relationships with the authorities, but they are also somewhat more optimistic than managers of farm enterprises concerning the impact of quota fulfillment on access to inputs and credits (Table 6.7). It seems that the sweeping program of government subsidies to agriculture is not really felt by its intended recipients. The subsidy-related responses of farm-enterprise managers and private farmers corroborate the finding that the total amount of government subsidies received is actually less than the total burden of taxes on agriculture (see Table 5.10). 84 Chapter Six: Table 6.7. Factors Stimulating Producers to Sell to State Procurement (percent of respondents) Farm enterprises Private farmers Policymakers Higher than market prices 0 13 .14 Supply of agricultural inputs in exchange for farm products Access to farm inputs from the state 8 7 31 11 20 26 7 9 37 40 34 17 Access to credit Need to keep good relationships with authorities iGeographicalSegmentation of Farm Sales Most producers restrict their sales to the larger administrative unit - the province (oblast) where they are located. The local district (raion) and province combined account for over 90% of sales for farm enterprises and 80% for independent farms (Table 6.8). More private farmers than farm enterprises restrict their sales to the local district, presumably because of difficulties with transportation and delivery. However, there is no special tendency among either farm enterprises or private farms to remain strictly within their district: producers of both categories venture outside the district and even outside the province in pursuit of sales. One-quarter of producers report sales outside their province. Export sales are still negligible, by both value and participation rate (Table 6.8). Thus, four farmers exported in total 200 tons of potatoes to Russia. The export record among farm enterprises is also very meager: one exported 12 tons of potatoes, three exported about a thousand tons of meat combined, and two more exported a thousand liters of milk. All these exports were also directed to Russia. Table6.8. Geographical Structure of Sales Percent of respondents reporting sales Farm enterprises Private farms Sales in local district (raion) only 17 36 Sales in local province (oblast) only* 69 61 I)omestic sales outside the province 26 25 lExportsales abroad 9 14 *Provincial sales include local district sales. Percentage of sales in each Farm enterprises Private farms 56 53 93 79 6 17 1 3 The geographical segmentation of the domestic market for farm products in Belarus may be attributable to administrative regulations and licensing requirements that restrict the free flow of food commodities across internal administrative boundaries. Farm-enterprise managers and private farmers report the existence of licensing requirements for shipment of farm products between provinces and, more surprisingly, also between districts within the same province (Table 6.9). Inability to obtain the appropriate permission may explain why private farmers-are relatively more confined to sales within their own district than the large farm enterprises, whose managers have more influence with the authorities and more experience in arranging the necessary administrative details (see Table 6.8). Most respondents report the need for special export licensing of shipments directed out of the country. 85 Farm Input Supply and Food Marketing Systems Table 6.9. Licensing Requirements for Shipments of Farm Products (percent of respondents) Policymakers Farmers Farm enterprises Permission requiredfor: Shipments out of the district (raion) Shipments out of the province (oblast) Export out of the country 17 46 33 80 47 37 90 69 53 Based on the responses of policymakers in Table 6.9, the official position on licensing requirements between provinces and certainly among districts is not as severe as presented by farm managers and individual farmers. This is probably yet another example of a situation where local intervention is more pervasive than the original intention of government policies. The low degree of integration of domestic food markets in Belarus today suggests that there is a wide scope for producers to benefit even from relatively minor alleviation of trade restrictions. 6.2. INPUT SUPPLY SYSTEM The large commercially oriented farm enterprises report using all the standard farm inputs and services (Table 6.10). Perhaps somewhat more surprisingly, the use of all major farm inputs, including fertilizer, herbicides, and pesticides, is also widespread among the much smaller and less commercial individual farmers. In addition to the percentage of producers reporting use of farm inputs, Table 6.10 gives also the percentage of producers reporting purchase of inputs from various sources. Both farm enterprises and independent private farmers rely extensively on purchased farm inputs. The difference between the two columns giving use and purchase of inputs is a measure of reliance on in-house production of farm inputs. Both farm enterprises and private farmers produce a substantial proportion of animal feed and young animals for own use. Farm enterprises also satisfy internally a considerable share of their needs for veterinary services, machinery maintenance and repair, mechanical field services, and construction services. The input supply system in Belarus, like the product marketing system, is still dominated by the government (Table 6.11). State sources virtually monopolize the supply of many manufactured inputs, including fertilizer, farm machinery, construction materials, and of course fuel: neither farm enterprises nor farmers report significant access to alternative sources of supply for these farm inputs. Inter-enterprise trade in inputs, whether manufactured or produced internally, is not particularly developed. Private suppliers still play a marginal role, but they are beginning to emerge as an important alternative in the market for herbicides and pesticides, spare parts, and veterinary drugs. Purchase of inputs from private suppliers is reported more frequently by farm enterprises than by private farmers. Own production of inputs (seeds, feed, young animals) is also more developed in farm enterprises than in private farms. 86 Chapter Six: Table 6.10. Use and Purchase of Farm Inputs by Farm Enterprises and Individual Farmers Farm enterprises Individual farmers Use inputs Buy inputs Use inputs Buy inputs Seeds, seedlings 94 75 83 80 Fertilizer 98 98 93 93 Pesticides, herbicides 99 99 83 83 Feed 99 59 43 17 Young animals 95 51 50 37 Veterinary drugs 95 95 47 47 Veterinary services 93 63 43 40 Farm machinery 99 99 NA NA Maintenance, repair 96 83 NA NA Spare parts 100 100 NA NA Fuel 100 100 NA NA Custom tillage services 86 68 NA NA Construction materials 94 91 NA NA Construction services 80 62 NA NA Extension 56 56 NA NA Average frequency score 93 80 63 57 Table 6.11. Supply Sources for Farm Inputs and Services (percent of farms reporting use of different sources for each input, multiple answers allowed) Farm enterprises Individual farms State Private Other Own State Private Other Own channels suppliers enterprises production channels suppliers enterprises production Seeds, seedlings 52 5 51 80 40 0 Feed 54 9 14 88 10 Young animals 9 0 35 82 20 Fertilizer 98 15 9 0 Pesticides, herbicides 98 42 6 Veterinary drugs 94 40 Veterinary services 62 53 33 7 7 37 7 17 17 90 3 3 0 0 67 30 3 0 2 1 43 3 3 0 6 0 49 30 0 7 3 Farm machinery 99 22 6 1 NA NA NA NA Maintenance, repair 75 15 15 47 NA NA NA NA Spare parts 99 53 14 1 NA NA NA NA Fuel 1(0 22 4 1 NA NA NA NA Custom tillage services 59 4 20 46 NA NA NA NA Construction materials 89 17 7 16 NA NA NA NA Construction services 57 9 2 40 NA NA NA NA Extension 54 3 1 1 NA NA NA NA Average frequency score 73 17 12 30 43 7 13 13 87 Farm Input Supply and Food Marketing Systems As a result, private farms are relatively more dependent on state supply channels than farm enterprises: they are able to exploit fewer alternative sources for farm inputs, perhaps because they are too small to negotiate effectively with commercial suppliers. This finding is consistent with the responses of private farmers concerning their motivation for selling to the state (see Table 6.7): access to farm inputs and credit is cited by a substantially higher percentage of private farmers than enterprise managers as an important factor in the decision to sell to the state. Producers experience difficulties mainly with manufactured inputs, such as fertilizer, pesticides and herbicides, farm machinery, fuel, veterinary drugs, and spare parts (Table 6.12). All these inputs are typically purchased from state suppliers or private firms (see Table 6.11), and the main complaint is that the prices are too high. Availability does not seem to be a problem: all inputs are available, but it is not always easy to purchase them because of high prices and shortage of cash. Difficulties with access to credit are raised only by private farmers, and at that only in connection with two inputs - farm machinery and fertilizer. Table 6.12. Reported Difficulties with Purchase of Farm Inputs (percent of respondents) Specific difficulties Respondents No money to available Not prices High reporting buy difficulties Shortage of credit Farm Enterprises Seeds 49 27 5 16 1 Feed 44 26 3 16 0 Fertilizer 78 52 0 24 3 Pesticides, herbicides 83 61 3 19 1 Farm machinery 93 62 1 27 3 3 Spare parts 76 49 1 24 Fuel 74 46 3 25 1 Veterinary drugs 76 47 0 30 0 Construction materials 70 40 0 30 1 Average score 71 46 2 23 1 Private Farms Seeds 47 40 0 0 3 Feed 27 13 0 0 3 Fertilizer 73 43 7 10 10 Pesticides, herbicides 80 60 3 7 3 Farm machinery 80 57 0 7 17 0 Spare parts 50 43 0 7 Fuel 47 37 0 0 7 Veterinary drugs 43 33 0 0 3 Construction materials 53 33 3 0 7 Average score 56 40 1 3 6 88 Chapter Six: The picture of difficulties with input supply constructed from the responses of the two groups of commercial producers is similar to that obtained from other World Bank surveys in the former Soviet Union. All the necessary inputs are available; the problem is how to find money to buy them. Yet the dominance of state channels in the input supply system in Belarus is much more pronounced than in many other CIS countries. The emergence of alternative private suppliers is still a very rudimentary phenomenon in Belarus, much less advanced than in other countries. One of the essential policy measures for the development of market infrastructure is to create the necessary preconditions and incentives for the emergence of private sector operations in both the product marketing and the input supply systems in Belarus. 7. Social Infrastructure and Standard of Living In the Soviet rural system, the responsibility of farm enterprises extended far beyond production and sale of food commodities. Farm enterprises were essentially responsible also for the maintenance of the rural social infrastructure and for the provision of social services to the rural population. These functions are incompatible with the new demands for profitability and productive efficiency. Therefore, in principle, there are plans and legislation to transfer the responsibility for rural social infrastructure and social services to the village council. This transfer of responsibility requires allocation of appropriate budgets and establishment of appropriate management functions in village councils - none of which has been done so far. As a result, farm enterprises continue to be de facto responsible for rural infrastructure, which is deteriorating at an alarming rate because of lack of funds. 7.1. RURAL SOCIAL SERVICES Farm enterprises provide a wide range of social benefits and services to their members. The social benefits are listed in the top part of Table 7.1, whereas the services to member households are grouped in the bottom part of Table 7.1. The main benefits include wage and pension increases compensating for inflation, free or subsidized annual vacation for employees, and education-related support to families and the school system (see the top part of Table 7.1). Many of these social benefits are normally expected to be financed from the government budget, with the farm enterprise acting merely as a delivery agency. Increasingly often, however, the farm enterprise has to provide bridging financing from its operating revenues due to delays in transfers from the government. In addition to work-related social benefits, farm enterprises also provide a wide range of social services to their employees, which are listed separately in the bottom part of Table 7.1. The government does not finance these services, and the farm enterprise often charges the households for the corresponding costs in full or in part (see below, Table 7.3). Among the services provided by the farm enterprise to their employees and pensioners, transportation and assistance with field work on the household plot stand out as the two most important ones (see the bottom part of Table 7.1). Help with transportation is essential in rural areas, where the state-run bus services are poor and trains are seldom available. Assistance with cultivating the household plot is necessary because families of farm-enterprise employees usually do not have farm machinery of their own. Employee families actually rely on the farm enterprise for many of the farm inputs and services that are necessary for maintaining the production on their household plots (Table 7.2). Around 70% of managers report that the farm enterprise supplies household plots with seeds, feed, young animals, veterinary services, and carries out mechanical field work on the household plot. Farm enterprises also supply household 89 Chapter Seven: 90 plots with manufactured inputs (fertilizer, herbicides and pesticides, veterinary drugs), but this practice is understandably more restricted than delivery of own inputs and services. Assistance of the farm enterprise to household plots is of tremendous importance to rural families because of the very substantial contribution of home-grown farm products to the family budget (see Table 7.10 below). Table 7.1. Social Benefits and Services to Farm-EnterpriseEmployeesas Reported by Managers and Employees(percentof respondents) Farm-enterpriseemployees Farm-enterprisemanagers NonAll sample Reorganized NonAll sample Reorganized (n=81) farms (n=48) reorganized (n=744) farms(n=439) reorganized (n=305) (n=33) Social benefits Wage premiumscompensating 79 73 88 46 40 55 17 74 49 44 48 26 21 23 77 48 42 50 31 29 9 70 52 48 45 18 9 7 22 19 13 19 6 4 5 22 12 11 14 7 5 10 23 29 16 26 4 3 Housingconstructionandrepair Heatingfuel 58 23 62 27 51 18 5 6 5 4 6 8 Subsidized utility services 33 35 30 5 5 5 Use of enterprise housing Transportation Help with field work on householdplot Burialservices Averagefrequencyscore 53 86 91 56 83 90 48 91 94 11 62 NA 10 55 NA 13 73 NA 89 85 94 NA NA NA 47 49 44 17 15 21 for inflation Pensionpremiums Free/subsidizedvacations Subsidizedfood products Childrenallowancesto families Supportfor schoolservices Stipendsto students Medicalcare Socialservices Among other social benefits and services, the most common are targeted primarily to farm-enterprise employees. These include subsidized vacation, wage increases to compensate for inflation, construction and repair of housing and farm buildings, provision of subsidized food, and use of enterprise housing, all of which are reported by more than 50% of farm-enterprise managers. Benefits for dependents (children allowances, stipends to students, augmentation of standard state pensions) and general household support (heating fuel, subsidized utilities, medical care) are provided less frequently (30%-50% of farm enterprises surveyed). Moreover, some of these benefits are properly the responsibility of the state, not the farm enterprise, which probably sometimes acts only in a paternalistic capacity to ease the pain of delays through official channels. There are no clear differences in the pattern of social benefits and services provided by reorganized and non-reorganized enterprises. Employees usually report lower Social Infrastructure and Standard of Living 91 provision rates than farm managers (a well-known technical effect), but the general pattern of frequencies is basically the same. Table7.2. AssistanceProvidedby Farm EnterpriseswithInputsand Servicesto HouseholdPlots (percentof farm enterprisesprovidingeach inputor service) All farm enterprises (n=81) Reorganized farms (n=48) Non-reorganized (n=33) Seeds, seedlings 63 58 70 Feed 72 67 79 Young animals 69 63 79 Fertilizer 12 17 6 Pesticides, herbicides 20 19 21 Farm machinery 28 25 33 Maintenance, repair 20 19 21 Spare parts 1 0 3 Fuel 11 8 15 Plowing, tillage 67 69 64 Veterinary drugs 37 42 30 Veterinary services 70 69 73 Construction materials 47 50 42 Construction services 36 33 39 Extension 4 2 6 Averagefrequencyscore 37 36 39 Some of the social services provided by the farm enterprise have a strong impact on rural life and the factors affecting household decisions. More than one-third of farm-enterprise employees indicated that they anticipated difficulties with transportation and construction services if they were to leave the collective and become private farmers. These two services appear to be central to the dependency of employees on their collective. Table 7.3. Terms for Delivery of HouseholdServices by Farm Enterprises(percent of farm enterprises providingthe service) For free Reorganized Subsidized rates Market rates NonReorganized NonReorganized Nonreorganized reorganized reorganized Construction and repairs 18 21 61 74 21 5 Heating fuel 0 0 72 81 28 19 Food products 0 5 90 95 10 0 Utilities, consumer services 0 5 74 84 26 11 Enterprise housing 8 5 68 86 24 10 Transport 3 10 92 80 5 10 Help with household plot 16 16 84 81 0 3 Burial services 63 77 37 23 0 0 Averagefrequencyscore 13 17 72 75 14 7 92 Chapter Seven: The social services listed in the bottom part of Table 7.1 are usually not provided free (with the exception of burial services). Most services, however, are provided at subsidized rates to the population, and this especially applies to the two major categories of transportation and assistance with field work in the household plot (Table 7.3). Farm enterprises are beginning to charge market rates for some services, such as heating fuel, utilities, enterprise housing, and construction work. Overall, market rates are still charged infrequently, but there is a clear difference in pattern between reorganized and non-reorganized farm enterprises: reorganized farms report charging marked rates for services with substantially higher frequency than nonreorganized farms. The provision of social benefits and services to employees and pensioners is a traditional responsibility of farm-enterprise managers in all former Soviet republics where farm enterprises still exist. Managers have always viewed this as their natural duty, and as a result never bothered to estimate the real costs involved. Although the financial burden imposed on the farm enterprise by all these benefits and services is not known, it clearly has a negative impact on the profitability of farm enterprises. In the future, farm enterprises should be allowed to concentrate on operating as businesses, and their managers should be relieved of the responsibility for taking care of social benefits and services to the rural population. Transfer of Social Assets Relieving the farm enterprises of their responsibilities for the social infrastructure is a necessary condition for transformation of collective farms into profit-oriented business entities. Transfer of responsibility for the social assets to the village council is the option envisaged by the law. This option, however, assumes that the village council receives appropriate budgets from the state to maintain the social infrastructure. Privatization is another option that may be exercised for some components of the social infrastructure, such as housing, shops, and restaurants. Table 7.4 shows that the progress with transfer or privatization of social assets has been very limited so far. Housing is the only asset that has been the subject of significant privatization: nearly 60% of managers report that housing in their farm enterprises has been privatized. Shops and restaurants, natural objects for private entrepreneurs everywhere, have not been privatized to any significant extent. A much more disturbing feature, however, is the low overall rate of transfer of social assets to the village council. Kindergartens, cultural facilities, and libraries are the only social objects that have been transferred to the village council by a significant number of farm enterprises. With regard to all other social assets, the predominant line is "no action": the situation remains as previously, and the farm enterprise continues to bear the full responsibility for the social assets and corresponding delivery of social services. Averaged across all components of the social infrastructure, more than half the farm enterprises report that they have not taken any action, and less than 20% indicate transfer of social assets to the village council. 93 Social Infrastructure and Standard of Living Table7.4. Transferof SocialAssetsby FarmEnterprises(percentof farm enterprises) No action Privatized Transferred to village council Housing 31 56 5 Kindergartens 26 2 56 School 59 0 21 Club, cultural facilities 52 1 35 Library 47 1 33 Medical facilies 51 1 23 Restaurant, cafeteria 57 0 5 Shops 61 3 9 Water supply system 74 1 10 Gas supply system 56 2 11 Electricity supply 72 1 4 Telephone communication 70 1 4 Internal roads 77 0 10 Averagefrequencyscore 56 5 18 Pending the transfer of social infrastructure to the village council, the farm enterprise remains responsible de facto for the maintenance of social assets and delivery of social services to the population. Overall, about half the farm enterprises report that they continue to provide some sort of support to public services in the village, which include various educational and cultural facilities. The support is mainly in the form of subsidized maintenance, while schools and kindergartens also get free food supplies from the farm enterprise (Table 7.5). Payment of salaries and provision of communal utility services is much less common today. Table7.5. Supportof PublicFacilitiesby Farm Enterprises(percentof farmenterprises) Formof support Percentof farm enterprises providing supportto facility Pay salaries Provideutility Provide Supplyfood services maintenance services School 70 0 7 25 38 Kindergarten 51 6 7 19 19 Club, cultural facilities 49 7 11 28 2 Library 38 2 14 20 2 Medical facility 37 4 10 17 6 Restaurant, cafeteria 35 9 2 11 12 Averagefrequencyscore 47 5 9 20 13 Chapter Seven: 94 Accessof IndependentFarmersto Social Services Independent private farmers operating outside the collectivist framework do not enjoy any of the long list of social benefits and services targeted by farm enterprises to their employees (see Table 7.1 above). Yet farm-enterprise managers report that, in their view, there is no discrimination against private farmers with the delivery of social services, and private farmers themselves do not complain of any major difficulties with access to social and public services (Table 7.6). Even transportation, which is the most popular service provided by farm enterprises to their employees, is not a difficulty for private farmers. Presumably, a little ingenuity and some cash are all that is needed to gain access to all social services in rural areas even without the help of the local farm enterprise. In most rural areas, social benefits are to a large extent still supplied by farm enterprises, and village councils typically do not have the budgets to provide independent farmers with the level of social services that farm enterprises deliver to their employees. It is therefore often argued that farm-enterprise employees may be hesitant to start farming independently because they fear losing their social benefits and services if they leave the farm enterprise. The survey does not support this view. A relatively small percentage of farm-enterprise employees are concerned about potential difficulties with access to social services if and when they leave the farm enterprise (Table 7.6). Transportation and construction are the main areas of concern, but even these services are mentioned by only 20%-25% of respondents. The actual experience of independent farmers with access to social services indeed confirms that this is probably a grossly exaggerated problem. Table 7.6. Difficultieswith Access to Social ServicesExperiencedby IndependentFarmersand Anticipated by Employeeson Exit from FarmEnterprise(percentof respondents) Constructionandhouse maintenance Transportation Heatingfuel supply Medicalcare School Pre-schoolcare Food supply Use of enterprisehousing Accessto subsidizedutilities Experienced by independent Anticipated by farm-enterprise farmers employees 17 3 7 3 7 0 0 3 3 22 25 4 2 3 2 3 5 5 Deteriorationof Rural Social Services Most respondents (40%-80%) agree that the social conditions in the village have cleteriorated since the beginning of reforms (Table 7.7). Farm-enterprise workers and individual farmers, representing the actual recipients of rural social services, give a unanimously negative assessment, which points to a strong deterioration of the social conditions in the village. Social Infrastructure and Standard of Living 95 Government officials in the capital are also very pessimistic in their assessment, with 83% of policymakers reporting deterioration of social conditions. Farm-enterprise managers, who bear the front-line responsibility for delivery of social services in the village, are only slightly less negative in their assessment. Still, about half the managers report that the social conditions in the village have deteriorated, while the other half mainly indicate no change. Very few managers believe that the social conditions in the village have improved, and virtually none of the other respondents share this view. Table7.7. Changesin SocialConditionsin the VillageSincethe Beginningof Reforms Farm-enterprisemanagers Farm-enterpriseemployees Individual Policymakers Reorganized NonReorganized Nonfarmers farms reorganized farms reorganized Positive No change Negative 15 46 40 9 30 58 6 33 61 4 24 72 0 23 77 0 17 83 There is a slight shift away from the very negative assessment of social conditions in reorganized farm enterprises (Table 7.7). This is characteristic of both managers and employees in these enterprises. Thus, 60% of managers in reorganized farms give a neutral or positive assessment of the change in social conditions, compared with only 40% in non-reorganized farms. Similarly, 40% of employees in reorganized farms evaluate the social conditions as unchanged or improved, compared with only 28% in non-reorganized farms. The higher assessment of social conditions in reorganized enterprises may be attributable to their better economic and financial performance, and also to the fact that in reorganized farm enterprises the management is more often directly responsible for the social services than in non-reorganized farms (see Table 7.9 below). Table7.8. WhatShouldbe Doneto ImproveProvisionof SocialServices(percentof respondents) Farm-enterprise Farm-enterprise managers employees Increasebudgetsfor socialservices 56 85 Chargea fee for some social services 44 6 Providesocial servicesonly to the needy 29 14 Note: Percentagesdo not add up to 100becausemultipleanswerswere allowed. Individual farmers 50 33 37 Policymakers 69 17 11 What is to be done to stop the deterioration of the social conditions in the village? All respondents believe that budgets for rural social services must be increased to improve the situation in the social sphere (Table 7.8). Farm-enterprise managers are also open to the suggestion of introducing payments at least for some social services, while employees naturally reject this option. Policymakers are very conservative in their thinking, and generally do not accept any option other than increase of budget spending on social services. The pattern of answers provided by individual farmers was very close to farm-enterprise managers. 96 Chapter Seven: Who Is Responsible for Rural Social Infrastructure? There is no uniform view of the institution responsible for maintaining the social infrastructure and social services in the village. The view essentially depends on who answers the question..Government officials (whose answers are listed under policymakers in Table 7.9 dutifully report that social infrastructure is mainly the responsibility of the local council: after all, this is the language of the law. Individual farmers, on the other hand, regard the national government as bearing the main responsibility for the social infrastructure and social services: this view is dictated by the personal feeling of the respondents, and is not necessarily grounded in budgetary facts. Finally, farm-enterprise managers report that the responsibility for the social structure is divided between the farm enterprise and the local council. The managers are probably the only ones who know the true facts concerning rural social infrastructure. When managers say that the farm enterprise is responsible for social services, this imeansthat the farm enterprise actually pays for these services. When managers say that the local council is responsible, this means that the farm enterprise does not pay, and the council pays for the services from its budget. Whatever the responsibilities of the national or local government in relation to social infrastructure, it is clear from the managers' answers that farm enterprises still play a very important role in maintaining and delivering the social services in the village. It is interesting to note that the percentage of respondents who attach primary responsibility for social infrastructure to the farm enterprise is higher among managers of reorganized farms than among those of non-reorganized farms (27% and 18%, respectively). Table 7.9. Who Has the Primary Responsibility for Social Infrastructure and Services in Rural Areas? (percent of respondents in each category) Farm-enterprise managers Individual Policymakers All sample (n=81) Reorganized farms (n=48) Farm enterprise 23 27 18 3 20 Local council 43 46 39 3 46 -District(raion) government 17 13 24 13 0 Provincial (oblast) government 0 0 0 7 0 National government 15 13 18 67 34 Non-reorganized farmers (n=33) 7.2. RURAL FAMILY INCOMES AND STANDARD OF LIVING Employees of farm enterprises derive only half of their family income from salaries, and in Belarus most of the salaries are paid in cash: the share of salaries in kind in total income is negligible (Table 7.10). Other personal income, mainly pensions and social transfers, contribute 6% to the family budget, and the remaining 43% is derived from the family plot. The importance of the household plot in rural life is primarily as a source of food products for own consumption by the family. Yet households also produce a surplus that they sell directly to consumers: 75% of households in the survey report sales of farm products from the household plot, and these households sell on average one-fifth of their output. For some products, such as milk, meat, eggs, vegetables, and fruits, households sell as much as 40%-50% of their total production. These sales Social Infrastructure and Standard of Living 97 generate enough cash to cover all the production costs of the household plot (including the share of costs that produce food for own consumption) and leave a modest net contribution to the family budget. Table 7.10. Rural Family Incomes: Cash Income and Imputed Value of Consumption of Own Farm Products Employee households (n=744) Million rubles Percent Farmers, million rubles (range based on n=19-22) Salaries 96 51 NA In cash 92 49 NA In kind 4 2 NA Other family cash income 11 6 NA Revenue from sale of farm products 17 9 760-830 -13 -7 600-630 Less cash costs Net cash income from sale of products Value of own products consumed Total family income in 1998 4 2 160-200 76 41 100-150 187 100 260-350 Private farmers have a substantially stronger commercial orientation than household plots: they sell on average 80% of their output (compared with 20% sold by household plots), and the level of their sales is much higher than the sales from household plots (Table 7.10). While household plot sales averaged 17 million rubles in 1998, individual farmers' sales ranged between 760-830 million rubles (depending on the technical method of calculation from survey data), admittedly from a much larger land allotment. Based on farm income only, individual farmers earned 260-350 million rubles in 1998. Employee families, on the other hand, earned 190 million rubles from all sources, including salaries and social transfers. The income reported in Table 7.10 for individual farmers is thus a lower bound on their total family income, which like the income of employee households includes salaries, pensions, and other transfers. Unfortunately, these components of farmers' family income were unavailable in the survey. Yet the survey shows that in half the farmers' families either the head of the family or the spouse have off-farm employment, and in one-third of the families both the husband and the wife have an off-farm job. These families naturally earn a salary from outside sources, which augments the farm income reported in Table 7.10. If we conservatively assume that off-farm salaries and other transfers in the average farmers' family contribute one-third of the amount of salaries and transfers in the average employee household (i.e., slightly more than 30 million rubles), the total family income of individual farmers rises to 290-380 million rubles, compared with 190 million rubles for employee households. The difference between the total family income of private farmers and employee households is statistically significant. Family Income in Belarus and Ukraine Compared It may be instructive to compare the family income of farm-enterprise employees in Belarus and in Ukraine. The data for Ukraine were obtained in a 1998-1999 survey of employee 98 Chapter Seven: households in reorganized and non-reorganized farm enterprises, which was conducted by the World Bank in cooperation with the Government of Ukraine.7 Table7.11.Structure of FamilyIncomeofFarm-Enterprise Employees in BelarusandUkraine Belarus Ukraine Salaries in cash Salaries in kind 49% 9% 2% 33% Salaries total 51% 42% Transfers 6% 11% Household plot 43% 43% -- 4% Total family income 100% 100% Monthly family income $111 $135 Other business income Note: Total family income includes cash income and imputed value of consumption from household plot. The monthly total family income is somewhat lower in Belarus: $111 compared with $135 in Ukraine (calculated at the official exchange rate in both countries). The household plot plays the same dominant role in both countries (Table 7.11). The main difference is in the structure of salaries: the bulk of the salary in Ukraine is paid in kind, whereas in Belarus salaries are mainly paid in cash. Another difference indicative of greater changes in the Ukrainian economy is that employee households in Ukraine are beginning to develop alternative business activities (trade, cottage industries), which already account for 4% of family income. In Belarus, no such alternative activities are observed as yet among the rural population. Sufficiency of Rural Family Income There is a considerable (and perhaps natural) inequality in the salary income of employees and managers in farm enterprises (Figure 7.1). The average salary income of an employee household is below 100 million rubles, while managers average 175 million rubles. There are also significant differences in salary income levels for each group of respondents in reorganized and non-reorganized farms. As discussed in Chapter 3, the reorganized farms are larger and therefore generate higher profits than 7Z. Fig. 7.1. Salary Income of Managers and Employees in Farm Enterprises millionrubles 200 150 _ ri _ 100 7 ifarms I Non-reoffanized 50 - 0 Emplovees Manaaers Lermanand C. Csaki, Ukraine:Reviewof Farm RestructuringExperiences,WorldBankTechnicalPaper459, Development Series,TheWorldBank, andSociallySustainable EuropeandCentralAsiaEnvironmentally DC,2000. Washington, Social Infrastructure and Standard of Living 99 the non-reorganized farms (they have had that advantage also before reorganization). As a result they can afford to pay higher salaries both to their employees and to their managers, which is clearly seen in Figure 7.1. All differences in salary income (between employees and managers; and within each group of respondents between reorganized and non-reorganized farms) are statistically significant. There appears to be considerable dissatisfaction among farm-enterprise employees and even managers with their level of eamings. Employees reported that they needed between 50-100 million rubles a month to "live normally". The median requirement reported by 50% of employees was 70 million rubles per month (Table 7.12). The actual monthly income of the average employee household in 1998, reached 16 million rubles (see Table 7.10), which is onefifth of the expressed requirement. Individual farmers appear to be more satisfied with their level of income. The monthly requirements of farmers' families are reported between 40-100 million rubles (similar to the requirements reported by employee households), with median of 60 million rubles per month. The actual monthly income in 1998 was 24-32 million rubles (including a modest estimate of off-farm income - see above). This is equivalent to one-half of the amount of money that farmers report as necessary for "normal living," a much higher proportion than for farm-enterprise employees. Table7.12.HowMuch Do You NeedPer Monthto Live"Normally"?(millionrubles) Employees Individualfarmers Median Interquartilerange Median Interquartilerange Monthlyrequirement Actualmonthlyincomein 1998 70 50-100 16 60 40-100 24-32 Individual responses about desired or required income must be treated with caution, as respondents naturally tend to exaggerate their needs (just as they tend to underreport their incomes). The fact that required income is substantially higher than actual income for both farmers and employees is therefore not surprising. It is reasonable to assume, however, that both farmers and employees bias their responses in a similar manner, and therefore the difference in the proportion of reported requirements covered by actual income provides a clear indication that farmers are on the whole better off than farm-enterprise employees. Assessment of the Standard of Living in Rural Areas The three groups of respondents representing the main rural constituencies - employee households, farm-enterprise managers, and independent private farmers - were asked to assess their present standard of living in terms of what their family income allows them to buy. The assessment was based on four major standard-of-living categories: 1. Below subsistence - the lowest standard of living: family income is not sufficient even to buy food and daily necessities; 100 Chapter Seven: 2. Subsistence - family income is just sufficient to buy food and daily necessities; 3. Adequate - the family can afford to purchase clothing and other household items after satisfying their food requirements and daily necessities; 4. Comfortable - the highest standard-of-living category: the family does not experience any material difficulties in daily life. Table 7.13. Assessment of the Family's Standard of Living by Managers and Employees in Farm Enterprises and Individual Farmers (percent of respondents) Farmers Managers Employees Below subsistence 3 6 23 S'ubsistence 33 67 69 Adequate 47 27 7 Comfortable 17 0 1 The assessment results are presented in Table 7.13. The independent farmers appear to have the highest standard of living among the rural population: nearly two-thirds report that their family income is adequate or allows them to live without special material difficulties. Employees in farm enterprises, on the other hand, experience the greatest material hardships: nearly onequarter of the respondents in this category classify their family income as "below subsistence," i.e., insufficient even to buy food and daily necessities. Most families in this category have just enough income to buy food and other daily necessities, while hardly anyone can afford anything more than the minimum. Farm-enterprise managers, with their substantially higher salary income, fall in between: nobody complains of sub-subsistence incomes, but nobody feels comfortable either. Over 90% of managers can at least satisfy their requirements for food and daily necessities, and many of them actually can afford more than the minimum. Table 7.14. Durable Goods in Rural Households (percent of respondents) Own today Plan to buy in the next 2-3 years Farmers (n=30) Employees (n=744) Farmers (n=30) Employees (n=744) Refrigerator 100 95 7 11 Television set 100 97 3 7 Washing machine 97 82 13 15 Vacuum cleaner 93 63 13 12 Video cassette recorder 40 15 20 7 Stereo 37 11 13 4 Car 93 40 17 6 This subjective assessment of the standard of living is reinforced by the findings of the survey on availability of appliances and other durable goods in rural households (Table 7.14). All rural households - those of independent farmers and those of farm-enterprise employees are equipped with refrigerators and television sets. Yet other appliances and durables, such as a washing machine, a vacuum cleaner, a VCR, or a stereo system, are reported more frequently by farmers' households than by farm-enterprise employees. The gap is particularly sharp where cars are concerned: more than 90% of independent farmers report owning a car, while only 40% of 101 Social Infrastructure and Standard of Living employee families have a vehicle. The greater affluence of independent farmers is also reflected in more ambitious acquisition plans for the near future: a higher percentage of farmers are planning to buy a car, a VCR, or a stereo system in the next 2-3 years (Table 7.14). Private farmers also appear to have a larger and better house than farm-enterprise employees: private farmers value their house between $3,000-$6,500 (43% of respondents), while farm-enterprise employees report that their house would fetch $1,500-$5,000 if sold (61% respondents). Table 7.15. Changes in Family Economic Situation: Past and Future (percent of respondents) Farmers Managers of farm enterprises Past: five years ago Better 4 60 Unchanged 80 13 Worse 14 13 Undecided 2 13 Better 10 30 Unchanged 38 13 Worse 19 7 Undecided 33 50 Future: next two-three years In addition to providing a positive assessment of the family's current well-being, private farmers report that their standard of living today is generally better than five years ago (Table 7.15). In other words, farmers' families are experiencing a process of dynamic improvement since they left the collective to start an independent farm. This is in sharp contrast to the assessment of farm-enterprise managers, who predominantly report no change in their standard of living during the last five years. Unfortunately, no comparable question was posed to farmenterprise employees. Expectations for the future are also substantially rosier for private farmers than for either farmenterprise managers or employees (Table 7.15, Figure 7.2). In general, of course, expectations for the future fail to elicit a response from onethird to one-half of respondents, which is understandable in view of the uncertain economic environment in the country. Yet despite Fig. 7.2. Optimism Among the Rural Population: View of the Future Compared to the Present Better Worse El I_I_ the widespread indecision, 30% of private farmers expect their standard of living to continue to improve, compared with only 10% of farm- enterprise managers who anticipate economic changes for the better [DEmployees Undecided 10 | R N 0 20 30 40 50 percentof respondents 60 70 Farmers 102 Chapter Seven: (Table 7.15). Private farmers are much more optimistic about the overall prospects for the future than farm-enterprise employees: 30% of farmers expect a better future, compared with only 5% among employees; on the other hand, 30% of farm-enterprise employees expect the future to be worse, compared with only 10% among farmers (Figure 7.2). Being a private farmer promises a substantially higher standard of living and supports a much more optimistic outlook of the world than among either employees or managers of farm enterprises. Separation from the traditional collectivist framework thus has an obvious economic attraction. Yet, private farmers face many difficulties in trying to maintain and develop their new way of life, and as we have seen in Chapter 3 there is not much enthusiasm among the farmenterprise employees to join the ranks of independent farmers, despite the attraction of better income and better life. 8. Effective Restructuring of the Farming Sector: Conditions and Principles While the reforms in Belarus have been stagnating, the former socialist world around it has been pressing on with the agenda of transition to market. The rich body of regional experience accumulated during the decade of transition may provide useful lessons for Belarus in designing its agrarian reforms. This chapter distills the experience of 22 transition countries: 12 former Soviet republics that are now members of the Commonwealth of Independent States (CIS), seven countries in Central Eastern Europe (CEE) that were Comecon members during the Soviet period, and the three Baltic states that were Soviet socialist republics until 1990 and are now regarded as part of the CEE bloc. The countries of former Yugoslavia (Slovenia, Croatia, Macedonia, Serbia) are not discussed because of insufficient data. The full list of transition countries considered in this chapter is given in Table 8.1 below. 8.1. WHAT CAN BELARUS LEARN FROM THE REGIONAL EXPERIENCE? The transition countries in the former Soviet Union and Central Eastern Europe embarked on their program of land reform and farm restructuring in the early 1990's from a common heritage in agriculture, which basically reflected the Soviet model of socialist agriculture that had dominated the region since the early 1950's. Despite this common heritage, however, different countries in the region adopted divergent paths of agrarian reform, the cumulative effect of which was to create a sharp "East/West divide" between Central Eastern Europe (CEE), on the one hand, and the Commonwealth of Independent States (CIS), on the other. The land reform strategies diverged in several dimensions, all of which involved privatization of productive resources and restructuring of inefficient forms of farm organization. Ownership of Land: Private versus State In the former Soviet Union and in Albania land was nationalized: private ownership of land was prohibited and all land was owned by the state. In the rest of CEE countries, private ownership of land did not cease after World War II, and no systematic nationalization of land was attempted. Thus, only 10%-20% of agricultural land was in state ownership as a result of various expropriation programs enacted in CEE after 1945. Today, the component of stateowned land in CEE has declined dramatically and land is generally in private ownership in all CEE countries, including Albania. Most former Soviet republics also allow private ownership of potentially all farm land, and land remains largely state-owned only in Belarus and Central Asia. However, the state still retains ownership of large land reserves (over one-third of agricultural land) even in CIS countries that legally recognize private ownership of land, and the task of land privatization across the region is not completed. 103 104 Chapter Eight: Private ownership of land is the norm in all market economies and in most transition countries. Transferability of Land Even in market economies, where private ownership of land is the norm, many farmers find it more efficient to rent land from others, instead of buying. If land transactions, be it sale or leasing, are restricted, farmers are prevented from adjusting their operations to a more efficient scale and there are no mechanisms for transfer of land to better, more efficient operators. The Polish experience after World War II proves that restriction of transfer rights in land is a serious obstacle to efficiency improvement, regardless of the legal form of land ownership. Private ownership is not synonymous with the right to transfer land among users: some transition countries circumscribe the right of land owners to engage in transactions in privately owned land, while other countries ensure full transferability of use rights in state-owned land. All CEE countries plus the "small" CIS countries (Armenia, Georgia, Moldova, and Azerbaijan) recognize private ownership of land and have no legal barriers to land transactions. In this respect, these 14 countries appear to be the most advanced in the process of land reform. Russia and Ukraine, which control the bulk of farmland resources in the region, legally recognize private land ownership, but buying and selling of land is restricted in practice, and land transactions are therefore mainly limited to leasing. The remaining countries (Central Asia and Belarus) generally do not recognize private land ownership, but they differ in their attitude toward land transactions: land use rights are secure and transferable in Kazakhstan, Kyrgyzstan, and as of very recently also in Tajikistan; on the other hand, Turkmenistan, Uzbekistan, and Belarus prohibit any transactions in land. Transferability of land use rights is essential for ensuring efficient operation of farms under market conditions. Privatization Strategy: Restitution versus Distribution Most CEE countries (except Albania) have chosen to restitute land to former owners. The CIS countries (and Albania) have adopted the "land to the tiller" strategy: land is allocated to workers without any payment and in an equitable manner. Hungary and Romania are two CEE countries that used a mixed strategy: land was restituted to former owners and also distributed without payment to agricultural workers in the interest of social equity. Distribution of former socialized land leads to privatization only in countries that recognize private land ownership: in all other countries, distribution gives access to use rights in state-owned land. Allocation of Socialized Land: Physical Plots versus Land Shares All CEE countries plus the "small" CIS countries (Armenia, Georgia, Moldova, and Azerbaijan) allocate physical plots to individuals. In Russia, Ukraine, Kazakhstan, and other CIS countries, individuals usually receive paper shares that certify their entitlement to a certain amount of land, without specifying a concrete physical plot. Effective Restructuring of the Farming Sector: Conditions and Principles 105 Procedures for land distribution to individuals vary across the region. The experience of the last decade highlights the tremendous importance of establishing clear and transparent mechanismsfor allocation and distribution of land by any procedure. Table 8.1. Characteristics of Land Relations in Transition Countries Potential private Privatization strategy Allocation ownership strategy Transferability Poland All land Sale of state owned land None Buy-and-sell, leasing Romania All land Restitution+distribution Plots Buy-and-sell, leasing Bulgaria All land Restitution Plots Buy-and-sell, leasing Estonia All land Restitution Plots Buy-and-sell, leasing Latvia All land Restitution Plots Buy-and-sell, leasing Lithuania All land Restitution Plots Buy-and-sell, leasing Czech Rep. All land Restitution Plots Buy-and-sell, leasing Slovakia All land Restitution Plots Buy-and-sell, leasing Hungary All land Restitution+distribution Plots Buy-and-sell, leasing Albania All land Distribution Plots Buy-and-sell, leasing Armenia All land Distribution Plots Buy-and-sell, leasing Georgia All land Distribution Plots Buy-and-sell, leasing Moldova All land Distribution Plots Buy-and-sell, leasing Azerbaijan All land Distribution Plots Buy-and-sell, leasing Russia All land Distribution Shares Leasing, buy/sell dubious Ukraine All land Distribution Shares Leasing, buy/sell dubious Kazakhstan Household plots only None Shares Kyrgyzstan* None None Shares Use rights transferable; buyand-sell of private plots dubious Use rights transferable Tajikistan None None Shares Use rights transferable Turkmenistan All land None; up to 50 ha of virgin land to farmers Intra-farm leasehold Use rights nontransferable Uzbekistan None None Intra-farm leasehold Use rights nontransferable Belarus Household plots only None None Use rights nontransferable; buy/sell of private plots dubious * Kyrgyzstan allowed private ownership of land following the June 1998 referendum, but the corresponding legislation is still not fully in place. Table 8.1 groups the transition countries in CEE and CIS into seven groups by several land-related measures. These include the legal attitude toward private ownership of land (whether private ownership is allowed or not), the land privatization strategy in countries that recognize private ownership of land (restitution to former owners or distribution to current workers), the strategy adopted for allocation of land to individuals (whether in the form of physical plots or paper certificates of endowment), and the transferability of land through buying and selling or through lease contracts. Belarus stands out in Table 8.1 as the only country that 106 Chapter Eight: recognizes only very limited private ownership of land, has no strategy for allocation of the bulk of farm land resources to individuals, and totally prohibits transfer of use rights. Individualization of Agriculture Individual or family farms are the dominant organizational form in agriculture in market economies, and it is important to measure the transition countries against the benchmark of individual farming. Individual agriculture is possible without land privatization, and land privatization does not necessarily create individual farmers. Restitution usually involves allocation of physical land plots to beneficiaries, either through direct assignment or ultimately through auction mechanisms. Rural residents typically take possession of their land and switch from collective to individual farming. Yet not all new land owners in CEE countries become farmers: some prefer the safety of the collective or corporate umbrella to the unfamiliar risks of individual farming; many decide to continue their professional lives in the city, leasing their newly acquired land to other individuals or corporate users. In the CIS, distribution to workers is generally in the form of paper certificates of land ownership, and the underlying land resources (together with other productive assets) are left in joint cultivation by the former collective farm or some corporate successor. Only two CIS countries (Armenia and Georgia) have implemented the extreme policy of dismantling the former collective farms and transferring most arable land to individual cultivation. Considerable progress toward individual farming is reported in Moldova and Azerbaijan. New experiments in this direction are beginning in Kazakhstan, Kyrgyzstan, and Turkmenistan. Overall, however, only a relatively small proportion of rural residents in the CIS opt for exit from collectives and establishment of individual farming on land allocated outside the collectivist framework. The extent of individual cultivation in CIS is thus substantially lower than in CEE (Figure 8.1). On average, 14% of agricultural land is cultivated individually across CIS, compared with 66% across the CEE countries. Individual farms in CEE and CIS still do not cultivate most of the agricultural land, contrary to the situation in market economies. Figure8.1 Shareof AgriculturalLandin Individual Tenure: 1997 100 percent of ag land 80 60 40 20 0 Al Sln La Po Ro Li Es Hu Bu CzSvk Ar Mo Gr Ky Ka Uk BeRu Az Ta Uz Tu Figure 8.1. Share of agricultural land in individual tenure in CEE (light bars) and CIS (dark bars): 1997. Abbreviations for CEE countries (light bars): Al = Albania, Sln = Slovenia, La = Latvia, Po = Poland, Ro = Romania, Li = Lithuania, Es = Estonia, Hu = Hungary, Ru =Bulgaria, Cz =Czech Republic, Svk = Slovakia; Abbreviations for CIS countries (dark bars): Ar = Armenia,Mo = Moldova, Gr = Georgia, Ky = Kyrgyzstan, Ka = Kazakhstan, Uk = Ukraine, Be= Belarus, Ru = Russia, Az = Azerbaijan, Ta = Tajikistan, Uz = Uzbekistan, Tu = Turkmenistan. Effective Restructuring of the Farming Sector: Conditions and Principles 107 Different Structure of Individual Sector There are significant differences in the organization of individual agriculture in CIS and CEE. Individual agriculture in CIS is mainly agriculture of small household plots, averaging less than 0.5 hectare each. Commercial family farms of 10-50 hectares or more cultivate only 2%-3% of land and produce a commensurate share of agricultural output. It is the household plots, however small, that control the bulk of the land in the individual sector and account for about 50% of all agricultural output in CIS, registering a dramatic increase since 1990 (Table 8.2). In the CEE countries, on the other hand, the roles of commercial family farms and small household plots are reversed: it is the commercial family farms of more than 5 hectares that cultivate most of the land in the individual sector, while household plots control a minor share of land and produce a very small proportion of agricultural output. The individual sector in CIS is mainly represented by household plots with semisubsistence production. The individual sector in CEE is shifting toward commercial family farms. Table 8.2. Share of Land in Individual Tenure in CEE and CIS (percent of agricultural land) and Share of Individual Production in CIS (percent of gross agricultural product), 1990 and 1997 Land in individual tenure Land in individual tenure Individual production CEE countries 1990 1997 CIS countries 1990 1997 1990 1997 Albania 4 100 Armenia 4 33 35 98 Slovenia 92 96 Georgia 7 24 48 76 Poland 77 82 Ukraine 7 17 27 53 Romania 12 67 Moldova 9 27 18 51 Hungary 6 54 Belarus 7 12 25 45 Bulgaria 13 52 Russia 2 11 24 55 Czech Republic 5 38 Kyrgyzstan 1 23 34 59 Slovakia 5 11 Kazakhstan 0.2 20 28 38 Latvia 5 95 Azerbaijan 3 9 35 63 Lithuania 9 67 Tajikistan 2 7 23 39 Estonia 6 63 Uzbekistan 2 4 28 52 Turkmenistan 0.2 0.3 16 30 Average CEE 21 66 Average CIS 4 14 28_ _ 55 Emerging Differences in Farm Organization Despite impressive gains in individualization of farming across both CEE and CIS (Table 8.2), large collective and corporate farms still play a much more prominent role in the region than in market economies, where agriculture is primarily based on family farms. However, important differences emerge between the organizational form of large corporate farms in CIS and CEE. The large farms in CIS are direct successors of former collectives. Although they have reorganized in a variety of corporate forms as a precondition for privatization of land, these successor farms continue to be managed like traditional collectives, showing very little internal 108 Chapter Eight: restructuring, very minor change toward profit orientation, and very little downsizing. Managers of these large farms still feel a social obligation to maintain a life-time employment policy for the large body of workers inherited from the former collective, and are unable to link worker remuneration to the actual work effort. Because of their social role in maintaining rural employment, the managers of these large farms do not feel bound by hard budget constraints and rely on an implicit support from the state. As a result, the newly reorganized large farms in CIS continue to suffer from low productivity of labor and lax financial discipline, like their predecessors in the Soviet era. On the other hand, the large farms in some CEE countries, certainly those in Hungary and the Czech Republic, are profit-motivated business corporations with freedom to adjust their labor force to operating needs and to reward labor according to performance. Moreover, these farms operate under hard budget constraints that impose strict financial discipline and rule out reliance on government bailouts. The scale of operation of these corporate farms in CEE countries, although still large by the standards of market economy, is substantially smaller than the scale of their cooperative predecessors. CIS agriculture is dominated by large farms that in most cases continue to operate like the former collectives. The corporate farms in CEE are substantially smaller and are much more sensitive to market stimuli. Impact of the Policy Environment on Growth Legal acceptance of private land ownership and the policy of allocating physical plots of land to individuals are the two main factors responsible for the substantially higher share of land in individual cultivation in the CEE countries and the "small" CIS countries (see Table 8.2). Overall, the differential reforms appear to have influenced both the general economic growth and the agricultural growth in the region. Figure 8.2 shows that most countries from the first three groups in Table 8.1 (which include the CEE countries and the "small" CIS countries) are characterized by positive growth rates in both output measures since 1992. On the other hand, most of the CIS countries (with the notable exception of Armenia and Georgia from the third group of "small" countries) fall in the "no growth" region with negative changes in the two output measures since 1992. In parallel with general economic and agricultural growth, labor productivity increased markedly since 1992 in the CEE countries (the first two groups in Table 8.1) and declined in the "small" CIS countries (the third group in Table 8.1) to a much smaller extent than in the rest of the CIS. The improvement in agricultural labor productivity has been largely due to sharp reductions of agricultural employment in the CEE countries rather than any significant growth in agricultural output. Labor migrated out of agriculture in these countries as a result of creation of alternative job opportunities in economies with higher GDP growth rates than in Russia, Ukraine, Belarus, and Central Asia. The general growth performance and the changes in agricultural labor productivity are a reflection of fundamental differences in the policy environment in these countries. The overall progress of agricultural and economic reforms is measured by the ECSSD Policy Reform Index, which is given in Table 8.3. The Reform Index is significantly higher for the countries in the first three groups than for the rest of the CIS countries. Effective Restructuring of the Farming Sector: Conditions and Principles 109 Figure 8.2. Change in Ag Output vs Change in GDP: 1992-1997 200 Ag Output, 1992=100 \ 150 100 - 100 East CEE R * West CEE ~~~~~~~~~~~~~~~~* '* "Small" Rest CIS t X Belarus 50 "No Growth" 0II 0 50 100 GDP, 1992=100 150 200 Legendto Figure8.2: East CEE= Poland,Romania,Bulgaria,and the Baltic states; West CEE= CzechRepublic,Hungary,Slovakia "Small" countries= Armenia,Georgia,Moldova,Azerbaijan(CIS);Albania(CEE) Rest CIS = Russia,Ukraine,Kazakhstan,CentralAsianrepublics Table8.3. ECSSDPolicyReformIndexfor TransitionCountries:1998 ECSSDPolicy ECSSDPolicy Poland 7.6 Russia 6.0 Romania 6.0 Ukraine 5.4 Bulgaria 5.4 Group average 5.7 Estonia 7.8 Kazakhstan 5.8 Latvia 7.6 Kyrgyzstan 5.8 Lithuania 7.0 Tajikistan 3.8 Groupaverage 6.9 Groupaverage 5.1 Hungary 8.6 Turkmenistan 1.8 CzechRep. 8.2 Uzbekistan 2.2 Slovakia 7.4 Groupaverage 8.1 Groupaverage 2.0 Albania 6.4 Belarus 1.6 Armenia 7.4 Georgia 6.2 Moldova 5.8 Azerbaijan 5.0 Groupaverage 6.2 110 Chapter Eight: What makes the countries in the first three groups different? In very general terms, it seems that these 14 countries have implemented and continue to implement relatively radical reforms in agriculture and in the rest of the economy. This is evident in their attitude to land; this is also evident in the restructuring of the traditional large farms, which have either disappeared completed in these countries or have undergone deep internal changes in management and operations. The "successful" countries in the first three groups have not switched entirely to small-scale family farming. They support farms in a wide range of organizational forms and sizes, but on the whole these farms are smaller than the traditional socialist farms both by their land endowment and by the number of workers they employ. The "successful" transition countries finally appear to be moving away from the Soviet pattern of farms that were large by all three production factors - land, labor, and capital. At this stage, we do not have systematic empirical evidence to judge the depth of reform or transformation at the farm level in different groups of countries. To draw some general conclusions, however, we can look at the two most visible and significantly striking manifestations of differences in the approach to agrarian reform across the region: one is the policy of distributing physical plots to individuals as opposed to the policy of distributing land shares in the form of paper certificates of entitlement; the other is the policy of establishing family farms versus the policy of maintaining collectives or cooperatives. The evidence is somewhat anecdotal at this stage, but it reinforces the previous conclusions from more general observations. Ukraine is a typical country where land is privatized by means of shares, not through distribution of plots. Armenia and Moldova, on the other hand, are countries where land is privatized through distribution of physical plots. The agricultural sector in Ukraine has stagnated throughout the entire decade, despite the country's fertile land resources. Armenia has shown respectable growth since 1992, whereas Moldova has demonstrated solid growth of individual production (in contrast to general collapse in the collective and state sector) after 1996, when the political powers finally agreed on a coherent land reform policy that included distribution of physical plots. Another interesting comparison is that between individual private farmers, who left the collectivist framework to establish an independent farming operation on their own plot of land, and the rural residents who remain workers of collectives. Collective workers, despite their entitlement to dividend payments and rent on their shares, report much lower family incomes, a much lower degree of satisfaction with their well-being, and a much lower degree of optimism regarding the future than independent private farmers. This finding is consistent in several surveys across Russia, Ukraine, and Moldova. There is something in individual initiative that appears to be much more satisfying and rewarding than in collective life (at least for certain groups of people). Work on comparisons of efficiency or total factor productivity between family farms and collectives in transition countries is just beginning, both at the World Bank and in other research institutions. There is still no conclusive empirical evidence that family farms in CIS or CEE are significantly more efficient than large collectives or cooperatives. Yet the available results clearly show that the large collectives or cooperatives certainly do not outperform the newly created individual farms anywhere in the region. This in itself is a finding of tremendous importance in that it contradicts the inherited socialist belief in the superiority of large-scale Effective Restructuring of the Farming Sector: Conditions and Principles 1]] agriculture, a belief which to this day has very many supporters in Russia, Ukraine, and other countries in the region. 8.2. WHAT CAN BELARUS DO FOR EFFECTIVE RESTRUCTURING? The ideal model of market agriculture assumes a sector based on private ownership of land and production assets, with a mix of profit-motivated individual and corporate farms. Whatever the organizational form, all farms operate under a strict financial discipline imposed by hard budget constraints: the successful farms survive and grow, while the unsuccessful ones fail and disappear. Moreover, farms in the market model are typically much smaller than in the former socialist model: even the largest farms generally cultivate a few hundred (and not thousands) hectares with a few tens (and not hundreds) of workers. Many countries in the region have made significant steps in the direction of this model, but most still have some distance to go. Belarus has lost a valuable decade in procrastinating: the gradual transition strategy has achieved very little, much less than in the other countries, and the continuing decline over a longer period of time now makes it that much more difficult to achieve recovery. From practical considerations it is obvious that Belarus cannot achieve immediately what took a decade for others to achieve. Yet the regional experience suggests certain minimum actions that are absolute essential for starting to move toward effective restructuring. Lack of Conducive Economic Environment Land reform and farm restructuring have the potential for improving productivity and efficiency of agriculture, but the accomplishments in Belarus in these areas have been very modest. Lack of a conducive economic and policy environment is one of the major reasons for slow changes in agriculture. The economic environment in Belarus is still characterized by pervasive government controls, state orders in the form of fixed-price procurement quotas, and extensive trade restrictions. All these strongly distort the producer incentives and prevent recovery of the agricultural sector. The overall economic and policy environment remains the major impediment to creating market-based agricultural enterprises. After nearly a decade of "gradual reforms," the macroeconomic environment in Belarus retains most of the distortions of the Soviet command economy. Heavy government intervention is felt in all sectors of the economy through price controls, currency regulation, trade restrictions, procurement quotas, and subsidies. The government sets the prices in virtually every market. In agriculture, food processing, and retail food trade, prices are set by the central government in the form of "indicative prices" or maximum profit margins that producers are allowed to charge. Trade restrictions are manifested in strict licensing requirements for commodity flows starting at the farm gate and in the establishment of maximum and minimum prices for imported and exported food commodities. Production and procurement quotas, which are a thing of the past in most CIS countries, have been retained for the large farm enterprises and, in a striking departure from previous practice, are now beginning to be imposed even on individual private producers. Compounding the distortions, the government attempts to offset the implicit taxation burden 112 Chapter Eight: imposed by price controls and production quotas through a sweeping program of producer subsidies. Pervasive price controls cause food shortages in retail stores and dampen producer i:ncentives. Administrative mechanisms that include procurement quotas, on the one hand, and quota-linked advance payments and commodity credits, on the other, are used to force farmers to sell their products to the state at non-negotiable conditions. Strict export and import controls impede trade flows with CIS neighbors and other European countries. The domestic currency is rnaintained at an artificially high level, and the government rations foreign exchange among authorized importers. The rigid economic regulation through price controls and procurement quotas virtually rules out involvement of private traders in food marketing channels. Nearly all input suppliers and food marketers are still owned and operated by state organizations or local government. The Soviet-style collective and state farms have not transformed into businessoriented operations and remain driven by production targets instead of productivity and profitability goals. Individuals remain salaried employees without incentives to improve productivity and efficiency. In 1997, the government extended the mandatory procurement quotas to the individual sector, including private farms and household plots. The individual sector, which managed to increase its production volume by 40% between 1990-1996 despite the steady decline in collective production, responded negatively to the new government initiatives: the agricultural output of the individual sector dropped 20% between 1996-1998. This is the most recent and perhaps most vivid example of the damage that government interventions and controls cause in the agricultural sector and, of course, in the economy as a whole. While individual production is steadily increasing in all former Soviet Union states, it is dropping in Belarus. The macroeconomic policy environment distorted by heavy-handed government intervention is at present the main constraint to meaningful agricultural sector reform. Pervasive price and trade controls reinforced by strict procurement quotas are major obstacles for the emergence of a profitable, market-oriented, sustainable agricultural sector. Private initiative, land reform, and enterprise restructuring are unlikely to succeed in such an environment. Comparative analysis of all transition countries suggests that economic recovery is closely correlated with market-oriented policy and institutional reforms. Thus, it is hard to expect significant recovery in Belarusian agriculture despite restructuring efforts. as long as policy and institutional reforms remain sluggish. Under the current overall economic and policy environment even the reorganized farms and, more importantly, the individual sector fail to perform to their maximum potential. Necessary Changes in the Policy Framework Successful recovery of Belarus agriculture and its transformation into a more effic ent market-oriented sector requires implementation of a comprehensive package of agricultural reforms. Ideally, this package should include the following key elements. Effective Restructuring of the Farming Sector: Conditions and Principles 113 * Creation of a favorable, liberalized, market-conforming macroeconomic environment that provides adequate incentives for improved efficiency and increased investments. * Genuine farm-restructuring and land-reform procedures designed to improve farm management practices and individual incentives through creation of mechanisms for transfer of land to the most efficient producers. * Development of demonopolized and competitive food processing and input supply industries through abolition of price, trade, and foreign exchange restrictions and elimination of administrative government controls. * Creation of institutional structures required by a market economy. * Clear resolution of responsibility and funding for social support services in rural areas. * Promotion of private sector development in rural areas. This is a comprehensive menu of actions, all of which are ultimately necessary for successful reform. However, the agenda is very broad, and specific steps in each area can be elaborated once a general agreement is reached on the overall outline of the reform process. The implementation of such a comprehensive package of reforms naturally involves political, social, and financial difficulties. Yet the experience of a whole decade of "gradualist" approach to reform in Belarus has clearly shown that avoiding reforms does not prevent economic deterioration, and postponing critical actions only exacerbates an already difficult situation. Even a minimum reform program focusing on elimination of some of the macroeconomic distortions and creation of a market-oriented farm sector (the first two points in the comprehensive reform agenda suggested above) could have a tangible impact at an acceptable political and fiscal cost. Critical Issues for the Immediate Future As a minimum, Belarus should adopt a reform program that deals effectively with issues of government intervention in agriculture and implements land-reform and farm-restructuring procedures conducive to the emergence of market-driven and profit-oriented producers. Such a minimum program should address the five critical issues outlined below. * The first critical issue is drastic reduction of government intervention in agriculture, including abolition of price controls and procurement quotas. Comparative analysis of 23 transition countries in Europe and Central Asia suggests that genuine macroeconomic and political reforms and overall economic recovery are the driving forces for reform and recovery in the agricultural sector. The 14 "successful" transition countries that are in advanced stages of overall economic reforms, in both Central Eastern Europe and the former Soviet Union, show healthy GDP growth and respectable agricultural performance. Economic recovery is closely correlated with market-oriented policy and institutional reforms. Thus, it is hard to expect significant recovery in Belarus agriculture despite restructuring efforts 114 Chapter Eight: as long as policy and institutional reforms remain sluggish. Under the current overall economic and policy environment even the reorganized farms and, more importantly, the individual sector fail to perform to their maximum potential. * The second critical issue is allocation of secure land use rights to individuals instead of collectives, allowing freedom of choice in disposition of these rights. Belarus is an exception among its neighbors in the attitude toward allocation and transferability of use rights in land. In most transition countries, land rights are allocated to individuals, either in the form of physical plots or as paper certificates of entitlement. Individuals then decide whether to cultivate their land allotments independently or to leave them in profitoriented corporate farms that promise dividends or rent payments. This mechanism of land allocation changes the incentive structure of both individuals and managers, immediately raising the level of responsibility and accountability for everything that happens in production. Belarus has so far prevented allocation to individuals of use rights in commercial farmland (other than household plots). As a result, the Soviet-style farm enterprises have not changed and the rural population retains its status of unmotivated salaried employees. * The third critical issue is to ensure transferability of use rights in land with the aim of achieving improved productivity and efficiency. Even in established market economies, where private land ownership is the norm, farmers do not own all the land that they use. Many farmers find it more efficient to rent land from others, instead of buying. This requires the existence of markets in which land can be transferred from one user to another. Transferability of land is a necessary condition for improvement of productivity and efficiency in agriculture. Yet in Belarus use rights in state-owned land are completely non-transferable. In this respect Belarus is much more conservative than even Kazakhstan, Kyrgyzstan, and Tajikistan, where land use rights in state-owned land are freely transferable through subleasing among individuals. In Belarus, the options for leasing land are extremely limited, and even leasing from the state is practiced by individuals very infrequently. Farmers and households are thus deprived of the main mechanism for augmenting their holdings, which in other former Soviet republics plays an important role in the absence of markets for buying and selling of land. Successful agriculture can be developed without universal private ownership of land, but this requires free transferability of land among users. Prohibition of transactions in land prevents flow of resources to more efficient producers and is a serious obstacle to efficiency improvement in the farming sector in Belarus. * The fourth critical issue for the immediate future is to ensure that farm enterprises undergo deep internal restructuring of their operations and accept pure business objectives based on profitability and productivity. In the 14 "successful" transition countries in Europe and Central Asia that have achieved positive growth in GDP and agricultural product (or at least one of them), the agricultural policies have produced a sector in which much of the land is individually cultivated or at least rights in land are individually controlled. Yet these countries have not switched exclusively to small-scale family farming. They generally support farms in a wide range of organizational Effective Restructuring of the Farming Sector: Conditions and Principles 115 forms, but on the whole these farms are smaller than the traditional socialist farms both by their land endowment and by the number of workers they employ. The "successful" transition countries appear to be moving away from the Soviet pattern of farms that were large by all three production factors - land, labor, and capital, in contrast to farms in market economies where capital is a substitute for labor, or vice versa. Size adjustment, however, is not the only factor that characterizes farm restructuring in the "successful" transition countries. The collective and cooperative farm enterprises in these countries have moved far beyond formal reorganization involving a mere change of legal registration. They have undergone deep internal changes in management and operations, transforming themselves into business-oriented entities motivated by productivity and profitability, instead of production targets. The experience in other transition countries shows that purely formal reorganization of farm enterprises, such as that in Belarus, will not produce beneficial economic impacts in agriculture. * The fifth critical issue is adoption of a coherent debt settlement program for farm enterprises that undergo genuine restructuring and introduction of hard budget constraints with a tangible threat of bankruptcyforfarms that default on new debt. To encourage genuine internal restructuring into business-oriented operations, the government should develop a coherent program for resolving the old debt overhang of farm enterprises. On the one hand, farms that undergo genuine restructuring must be allowed to start operating without the burden of accumulated debt, which to a large extent is the result of the previous government interventions in the economic environment. On the other hand, debt resolution must be conditional on a genuine restructuring effort. Debt resolution and farm restructuring are interlinked and interdependent. After their debt problem is resolved, farm enterprises will have to operate under hard budget constraints and plan their operations so as to avoid unsustainable accumulation of new debt. It must be clear to the government and to farm enterprises that there will be no further writeoffs of new debt in the future: restructured farm enterprises must observe normal financial discipline and bear full responsibility for the results of their operating decisions. This means that bankruptcy procedures should be initiated in the future against those farms that will not be able to meet their new repayment obligations. The five critical issues listed above constitute a minimum program of farm sector reforms for the next 3-5 years. They are a restricted subset of the comprehensive reform package recommended for the longer term, and as such they provide a concrete program of action for which specific implementation steps can be developed. Many other critical issues will require attention when the government begins to elaborate the actions for the implementation of the remaining components of the reform package. One of the more important issues for the next stage includes resolution of the impasse with maintenance and development of rural social infrastructure. This will necessitate allocation of sufficient budgets to local governments and development of alternative employment opportunities in rural areas to allow shedding of agricultural labor as a prerequisite for productivity improvement. Yet all these may be viewed as longer-term objectives, and the minimal five-step program proposed above can be expected to produce tangible benefits within a relatively short period of time. Adoption of a credible reform program by the government, even in this minimalistic format, will create favorable conditions for assistance from international donors, including the World Bank, and a favorable atmosphere for foreign investors. Selected References on Land Reform and Farm Restructuring in Transition Economies World Bank Country Reports and Agricultural Sector Reviews Food and Agricultural Policy Reforms in the Former USSR: An Agenda for the Transition, Studies in Economics of Transformation, Vol. 1, The World Bank, Washington, DC (1992). An Agricultural Strategy for Albania, The World Bank and the European Community, Washington, DC (1992). Albania: Building a New Economy, Report No. 12342-ALB, The World Bank, Washington, DC (1994). Armenia: The Challenge of Reform in the Agricultural Sector, The World Bank, Washington, DC (1995). Azerbaijan: Agricultural Sector Review, Report No. 14541-AZ, The World Bank, Washington, DC (1995). Belarus: Agriculture and Food Sector Review, Report No. 12576-BY, The World Bank, Washington, DC (1994). Estonia: Agriculture and Forestry Sector Review, Report No. 13316-EE, The World Bank, Washington, DC (1995). Georgia: Agriculture and Food Sector Review, Report No. 14659-GE, The World Bank, Washington, DC (1995). Hungary: Review of Agricultural Policy, Report No. 13475 HU, The World Bank, Washington, DC (1994). Kazakhstan: Agricultural Sector Review, Report No. 13334-KZ, The World Bank, Washington, DC (1994). The Kyrgyz Republic: Agricultural Sector Review, Report No. 12989-KG, The World Bank, Washington, DC (1994). Latvia: Agricultural Sector Review, Report No. 12401-LV, The World Bank, Washington, DC (1994). Lithuania: Agriculture and Food Sector Review, Report No. 13111-LT, The World Bank, Washington, DC (1995). Moldova: Moving to a Market Economy, World Bank Country Study, The World Bank, Washington, DC (1994). Moldova: Agriculture Sector Review, Report No. 12581-MD, The World Bank, Washington, DC (1995). An Agricultural Strategy for Poland, The World Bank and the European Community, Washington, DC (1990). Romania: A Strategy for the Transition in Agriculture, Main Report, The World Bank, Washington, DC (1993). Turkmenistan, World Bank, Washington, DC (1994). Turkmenistan: Review of the Agrarian Sector, Report No. 15621-TM (draft), The World Bank, Washington, DC (1996). Ukraine: The Agriculture Sector in Transition, The World Bank, Washington, DC (1994). 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