Agricultural Cooperatives in Transition Countries

    
 
                                                                                              
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7>:9 Contents PREFACE................................................................................................................................................................. 5 ORIGINS ................................................................................................................................................................. 7 1. AGRICULTURAL COOPERATION IN THE USSR AND FORMER SOVIET UNION ............................................ 9 COOPERATIVES DURING THE SOVIET ERA ....................................................................................................................... 9 TRANSITION TO A MARKET ECONOMY ........................................................................................................................ 10 2. SCOPE FOR COOPERATION IN THE FORMER SOVIET UNION .................................................................. 13 3. LAND REFORM AND THE FUTURE ROLE OF COOPERATIVES IN AGRICULTURE IN THE FORMER SOCIALIST COUNTRIES IN EUROPE .................................................................................................................................. 16 COMMON HERITAGE OF SOCIALIST AGRICULTURE......................................................................................................... 17 Collectivization .............................................................................................................................................. 17 Land Ownership ............................................................................................................................................ 19 Need for Reform............................................................................................................................................ 20 LAND OWNERSHIP REFORMS.................................................................................................................................... 21 THE FUTURE OF LARGE-SCALE FARMS ........................................................................................................................ 24 LEASE COOPERATIVES AND SHAREHOLDER STRUCTURES ................................................................................................. 25 FIRST EXPERIENCES WITH PRIVATE FARMING AND FARM ENTERPRISE RESTRUCTURING ........................................................ 27 ROLE OF WESTERN-TYPE SERVICE COOPERATIVES ........................................................................................................ 29 CONCLUSION ......................................................................................................................................................... 31 REFERENCES.......................................................................................................................................................... 31 4. TRANSFORMATION OF COOPERATIVE FARMS IN CENTRAL AND EASTERN EUROPE............................... 33 THE INHERITED SYSTEM ........................................................................................................................................... 34 PRIVATIZATION OF LAND.......................................................................................................................................... 35 INDIVIDUALIZATION OF AGRICULTURE ........................................................................................................................ 38 RESTRUCTURING OF FARMS...................................................................................................................................... 40 EMERGING FARM STRUCTURE .................................................................................................................................. 42 SECTORAL CHANGES DURING TRANSITION .................................................................................................................. 49 WHERE TO FROM HERE? ........................................................................................................................................ 53 A NOTE ON SOURCES OF DATA ................................................................................................................................. 55 5. AGRICULTURAL COOPERATIVE ENTERPRISE IN THE TRANSITION FROM SOCIALIST COLLECTIVE FARMING 56 ECONOMIC ENVIRONMENT OF THE EARLY 1990S ......................................................................................................... 56 POTENTIAL FOR COOPERATIVES................................................................................................................................. 59 EXPERIENCES WITH NEW COOPERATIVES .................................................................................................................... 62 MARKETING AND INPUT-SUPPLY COOPERATIVES .......................................................................................................... 66 SUMMARY ............................................................................................................................................................ 69 REFERENCES.......................................................................................................................................................... 71 6. AGRICULTURAL COOPERATIVES IN EURASIA .......................................................................................... 73 WHY AGRICULTURAL COOPERATIVES?........................................................................................................................ 73 THE GREAT DIVIDE WITHIN EURASIA ON AGRICULTURAL COOPERATIVES .......................................................................... 75 POLICY AND LEGISLATIVE SUPPORT FOR COOPERATIVES ................................................................................................. 78 AGRICULTURAL SERVICE COOPERATIVES IN CIS-G COUNTRIES ........................................................................................ 78 CONCLUSIONS ....................................................................................................................................................... 83 REFERENCES.......................................................................................................................................................... 85 1 7. COOPERATIVE DEVELOPMENT IN CENTRAL ASIA ................................................................................... 88 CONCEPTUAL ISSUES OF AGRICULTURAL COOPERATIVE LEGISLATION IN CENTRAL ASIA ........................................................ 89 Smallholder Agriculture and the Rationale for Service Cooperatives ........................................................... 89 Western Classification of Cooperatives ........................................................................................................ 92 Classification of Cooperatives in Legislation in Central Asia ......................................................................... 96 Need for Consistent Definitions .................................................................................................................. 101 TAXATION OF COOPERATIVES ................................................................................................................................. 102 Exemption from Value Added Tax .............................................................................................................. 103 Exemption from Retail Sales Tax ................................................................................................................ 104 Exemption of Distributions to Members from Profit Tax ............................................................................ 104 OBSERVATIONS FROM THE FIELD: COOPERATIVES IN TAJIKISTAN AND KYRGYZSTAN ........................................................... 108 Fledgling Service Cooperatives in Tajikistan ............................................................................................... 108 Dominance of Production Cooperatives in Kyrgyzstan ............................................................................... 110 COOPERATIVE DEVELOPMENT POLICY FOR CENTRAL ASIA ............................................................................................ 117 World Practice and Central Asia ................................................................................................................. 117 Promoting Cooperatives: Information Campaign and Legal Framework for Cooperatives ........................ 119 Development of a Multi-level Cooperative System for Denser Coverage ................................................... 121 REFERENCES........................................................................................................................................................ 122 8. COOPERATIVE DEVELOPMENT IN TAJIKISTAN ...................................................................................... 124 THE ROLE OF COOPERATIVES AS SERVICE PROVIDERS .................................................................................................. 124 CREATION OF COOPERATIVES ................................................................................................................................. 125 Western Classification of Cooperatives ...................................................................................................... 126 Classification of Cooperatives in Republic of Tajikistan Legislation............................................................ 129 RELATIONS AND CASH FLOWS BETWEEN MEMBERS AND THE COOPERATIVE .................................................................... 132 TAXATION OF COOPERATIVES ................................................................................................................................. 133 EXEMPTION FROM VALUE ADDED TAX ..................................................................................................................... 134 EXEMPTION OF DISTRIBUTIONS TO MEMBERS FROM TAX ............................................................................................. 135 EXEMPTION FROM RETAIL SALES TAX ....................................................................................................................... 137 PROMOTING COOPERATIVES................................................................................................................................... 137 9. COOPERATIVES IN KYRGYZSTAN: FINDINGS FROM A SURVEY OF COOPERATIVES AND USERS ............. 140 WESTERN CLASSIFICATION OF COOPERATIVES............................................................................................................ 141 DATA SOURCES ON AGRICULTURAL COOPERATIVES IN KYRGYZSTAN ............................................................................... 143 FUNCTIONAL TYPOLOGY OF COOPERATIVES SURVEYED ................................................................................................ 144 SERVICE ACTIVITIES OF THE COOPERATIVES ............................................................................................................... 145 TAXATION AND FINANCIAL PERFORMANCE OF COOPERATIVES....................................................................................... 146 FARMERS’ ATTITUDES TOWARD COOPERATION.......................................................................................................... 147 EFFECT OF COOPERATION ON FARMERS’ WELLBEING .................................................................................................. 151 CONCLUSIONS ..................................................................................................................................................... 153 REFERENCES........................................................................................................................................................ 154 10. AGRICULTURAL COOPERATIVE DEVELOPMENT IN KAZAKHSTAN AND UKRAINE .............................. 156 THE NEED FOR AGRICULTURAL SERVICE COOPERATIVES IN KAZAKHSTAN AND UKRAINE ..................................................... 158 UKRAINE AND KAZAKHSTAN POLICIES ON AGRICULTURAL SERVICE COOPERATIVES ............................................................ 159 Ukraine ....................................................................................................................................................... 159 Kazakhstan ................................................................................................................................................. 161 ENABLING ENVIRONMENT: CLASSIFICATION AND CHARACTERISTICS OF COOPERATIVES ...................................................... 162 UKRAINE AND KAZAKHSTAN LEGISLATION ON AGRICULTURAL SERVICE COOPERATIVES ....................................................... 164 The USSR Law on Cooperation .................................................................................................................... 164 Ukraine Cooperative Law ............................................................................................................................ 165 Kazakhstan Cooperative Law ...................................................................................................................... 166 TAXATION OF COOPERATIVES ................................................................................................................................. 167 Conceptual Issues of Cooperative Taxation ................................................................................................ 168 Ukraine: Taxation of Cooperatives ............................................................................................................. 170 2 Kazakhstan: Taxation of Cooperatives........................................................................................................ 171 CONCLUSION ....................................................................................................................................................... 172 REFERENCES........................................................................................................................................................ 173 11. COOPERATIVES IN CIS AND GEORGIA: OVERVIEW OF LEGISLATION ................................................ 176 THE DICHOTOMY OF PRODUCTION AND SERVICE COOPERATIVES IN CIS .......................................................................... 178 INVENTORY OF COOPERATIVE LAWS IN CIS................................................................................................................ 181 CONTENT OF COOPERATIVE LAWS ACROSS CIS .......................................................................................................... 182 Existence of Cooperative Laws .................................................................................................................... 185 Cooperative Objective ................................................................................................................................. 188 Dichotomy Between Production and Service (“Consumer”) Cooperatives.................................................. 188 Cooperative Membership............................................................................................................................ 189 Member Participation in Cooperative Activity and in Labor Input.............................................................. 190 Transactions with Members and Non-Members ........................................................................................ 190 TAXATION OF COOPERATIVES ................................................................................................................................. 191 Value Added Tax (VAT) ............................................................................................................................... 191 Tax on Profits .............................................................................................................................................. 192 REGISTRATION REQUIREMENTS FOR COOPERATIVES .................................................................................................... 195 CONCLUSION ....................................................................................................................................................... 198 REFERENCES........................................................................................................................................................ 200 3 4 Preface This volume is a collection of ten articles that I wrote with two colleagues, Csaba Csaki and David Sedik, over a period of lasting collaboration from 1989 to 2016. The publishing policy of LAP – Lambert Academic Publishing has made it possible to bring these articles together in a single book and thus present the readers with a broad retrospective of the evolution of the idea of agricultural cooperation in transition countries in Eastern Europe and Central Asia (the ECA region) over nearly three decades. The origins of the ten articles are listed after the Preface. The dates when the articles where written or conceived are also shown in parentheses next to the authors’ names in each chapter in this volume. The articles grew out of the authors’ work at the World Bank and the Food and Agriculture Organization of the U.N. They were all part of a concerted effort to provide policy advice to former Socialist countries in Europe and Central Asia in an attempt to help governments navigate the complex transition from centrally planned to market economy. We were witnesses to a process of truly historic proportions that was affecting, and continues to affect, the wellbeing and fortunes of the large rural populations in the region and, despite the unavoidable upheaval, proceeded without major social unrest. The work on agricultural cooperatives in transition countries is inseparable from the study of land reform and farm restructuring in the region. The hallmarks of the Soviet agricultural model – the large collective farms (kolkhozes) – were in essence production cooperatives and they left a deep imprint on the agriculture sector and the rural psyche, which has persisted since the beginning of the transition in 1989-1991 to this day. Most of the chapters focus in depth on the Soviet model of agriculture as it was implemented in the USSR, but we also deal – albeit in less detail – with the somewhat different model of socialist agriculture that evolved in Central Eastern Europe (“the Comecon countries”, see Chapters 3 and 4). The Soviet model in the USSR crystallized during the 1920s and began to transform in 1990-1991, with the dissolution of the Soviet Union, while the Central Eastern European model emerged in the 1950s, when communist regimes took over, and its transformation began in 1989, with the first signs of disengagement of the central powers in Moscow. As is to be expected in a thematic collection of articles written at different times for different audiences, there is unavoidable overlap between various chapters in this volume, especially in chapters 5-10 devoted to the recent development of agricultural cooperatives in former Socialist countries in the ECA region. We believe that the readers will not read 5 the book cover to cover but will mostly pick and choose particular chapters that interest them. The repetitions across various chapters would make each chapter stand on its own and allow us to dispense with cross-references to other chapters within the volume. We have therefore decided not to edit out the repetitions, intentionally allowing some redundancy that, hopefully, will be in the readers’interest. In the same spirit, the references appear at the end of each chapter separately. I would like to take this opportunity to pay tribute to the late Bruce Gardner, a great agricultural economist and policymaker with whom I had the distinct privilege of coauthoring Chapter 5 on agricultural cooperative enterprise during the transition from Socialist collective farming. I worked with Bruce in close collaboration from 2000 to his untimely death in 2008 on a multi-national project that studied factor market constraints in Russia’s agriculture. The project results were published in a special issue of the journal Comparative Economic Studies (Vol. 47, No. 1, March 2005) and in a volume that I edited under the title Russia’s Agriculture in Transition: Factor Markets and Constraints on Growth (Lexington Books, Lanham, MD, 2008), which fittingly ends with a summary chapter by Bruce Gardner. These two publications are a modest contribution to Bruce’s extensive scholarly legacy. Zvi Lerman Department of Environmental Economics and Management The Hebrew University of Jerusalem, Israel 6 Origins 1. Agricultural Cooperation in the USSR and Former Soviet Union May 2002; earlier version presented in April 1996 at the conference on modernization and democratization in former Soviet Central Asia, U. of Minnesota, Minneapolis, MN 2. Scope for Cooperation in the Former Soviet Union 1990-1991; contribution to World Bank’s “Land Reform and Restructuring of Kolkhozes and Sovkhozes in the Former USSR and Russia” (Review of Food Policy Options and Agricultural Sector Reforms, Working Paper #3, July 1992) 3. Land Reform and the Future Role of Cooperatives in Agriculture in the Former Socialist Countries in Europe Earlier version presented in April 1992 at the International Association of Agricultural Economists’ Interconference Symposium, Ma’ale Hachamisha, Israel 4. Transformation of Cooperative Farms in Central and Eastern Europe June 2000; presented at the World Bank/EU Workshop on structural change in the farming sectors of Central and Eastern Europe, Warsaw, June 1999. 5. Agricultural Cooperative Enterprise in the Transition from Socialist Collective Farming Conceived in June 1995. Written in September 2006 for Center of Agricultural Economic Research Discussion Paper Series, Rehovot, Israel. Earlier version published in Journal of Rural Cooperation (2006). 6. Agricultural Cooperatives in Eurasia March 2014; part of the series Policy Studies in Transition, Food and Agriculture Organization of the U.N., Regional Office for Europe and Central Asia (FAO/REU) 7. Cooperative Development in Central Asia April 2013; part of the series Policy Studies in Transition, FAO/REU 8. Cooperative Development in Tajikistan April 2012; background study for the Tajikistan Land Reform Working Group during the development of a new law of cooperatives (FAO Tajikistan, Dushanbe) 9. Cooperatives in Kyrgyzstan: Findings from a Survey of Cooperatives and Users February 2014; analysis of a survey conducted by FAO/REU in the spring of 2012 10. Agricultural Cooperative Development in Kazakhstan and Ukraine October 2013; presented at the International Economic Association’s 17th World Congress, Dead Sea, Jordan (June 2014). 11. Cooperatives in CIS and Georgia: Overview of legislation March 2014; part of the FAO/REU project to develop an online database of cooperative laws in CIS 7 8 1. Agricultural Cooperation in the USSR and Former Soviet Union Zvi Lerman (1996-2002) Agricultural cooperation has a long tradition in Russia and in many other republics of the former Soviet Union. Agricultural cooperatives began to develop in Russia in the period between the 1860s and the 1890s, soon after the introduction of co-ops in Western Europe. By 1917, some 10 million Russian peasants were members in 16,500 credit societies and over 2 million were members in 12,000 other agricultural cooperatives. Cooperatives during the Soviet era The evolution of Russian cooperation in the 1920s was characterized by the rapid emergence of national cooperative unions of specialized producers. These national organizations often initiated and guided the “top-down” creation of local and regional cooperatives. Another feature of the 1920s was the spontaneous and completely voluntary emergence of agricultural production cooperatives. These early collectives, created by peasants pooling together their small allotments of land or sometimes joining without any land at all, were expected to act as the primary link in the vertically integrated system of agricultural cooperation that was developing in the Soviet Union at that time. In 1929, Stalin’s collectivization campaign began. This campaign was couched in cooperative terms, stressing the advantages of cooperation and emphasizing voluntary membership. Yet in practice the drive had all the elements of forced conscription, reinforced by political and physical intimidation. By 1980, there were around 30,000 collective farms in the USSR, each with about 3000 ha of land and 500 employees. 9 Agricultural Cooperatives in Transition Countries The Standard Charter of a collective farm is a model of cooperative principles. It speaks in glowing terms of the kolkhoz as a “form of agricultural production cooperative of peasants that voluntarily unite for the purpose of joint agricultural production based on . . . collective labor.” It asserts that “the kolkhoz is managed according to the principles of socialist self-management, democracy, and openness, with active participation of the members in decisions concerning all aspects of internal life.” In practice, however, the collective farm that emerged after collectivization did not have many characteristics of a true cooperative, except joint ownership of non-land assets (land in the Soviet Union was nationalized in 1917) and remuneration of residual profit in proportion to labor and not capital. The basic principle of voluntary membership had been violated by the very process of forced collectivization; members did not retain a right of free exit, and those who managed to leave could not take their share of land and assets with them; and the role of the “sovereign” general assembly and the “democratically elected” management was reduced to rubber-stamping. The collectivization of Soviet agriculture in the 1930s made redundant the tens of thousands of credit, marketing, and service cooperatives that had developed during the 1920s. They disappeared as the collective farms evolved into multifunctional rural organizations that took care of large-scale agricultural production and also interfaced directly with local and central government on matters of farm input supply (which replaced “input purchasing”), product deliveries (which replaced “marketing”), and residual financing from the state budget (which replaced credit negotiations). Transition to a Market Economy The countries of the former Soviet Union continue to negotiate the difficult transition from a centrally planned economy to a market-oriented economy based on private property and individual initiative. There are two aspects to the transition, which began in 1991: transfer of property rights in land, and designation of ownership of farm assets. Despite their newly found ownership of land and assets, people are not willing to leave the collective organization. In recent surveys, 85% of collective farm members in Russia and 78% in the Ukraine indicated they did not intend to leave the collective and become private farmers. Members of former collective farms are thus voting with their feet for perpetuation of the cooperative framework, at least in the immediate future, probably because of the sense of security it affords in a highly uncertain and rapidly changing environment. 10 1. Agricultural Cooperation in the USSR and Former Soviet Union A typical restructuring procedure involves internal reorganization of the old collective into a system of relatively small autonomous profit centers or units. Because of the relatively small size of such units, which are organized as partnerships, cooperatives, or small corporations, the active workers maintain the sense of private ownership of production assets. The old management structures of the collective may in turn reorganize to provide the necessary services and support to these autonomous units. Agricultural production is thus concentrated in units that are small enough to maintain a good sense of personal involvement and accountability, while farm-support services and the interface with the environment are provided by a relatively large and professionally experienced cooperative structure. With time, as the constituent units gain experience, they may become more independent of the former management, whose role is gradually reduced to that of a service cooperative that member units use as needed. Some individuals nevertheless exercised their new right to establish an independent private farm outside the cooperative framework. There were about 300,000 such individual farms in Russia and 30,000 in Ukraine by 2001. After an initial flush of enthusiasm, private farmers began to realize that totally independent individual farming is very difficult, especially in their current economic environment. Private farmers need credit to satisfy their requirements for working capital and long-term investments; they also need trade channels both for purchasing farm inputs and for marketing their products. Both of these things are generally missing. The credit and banking system, which traditionally functioned as a window for transfer of funds from the budget to large collective and state farms, was not designed to finance independent farming operations, and the new commercial banks showed little interest in agricultural lending. The state supply monopolies had been replaced with “privatized” monopolies, but a network of rural outlets for selling inputs and implements to private farmers had not yet developed. One strategy to overcome these deficiencies was the establishment of central cooperative unions and national associations of farmers. The governments in Russia and Ukraine, for instance, encouraged and actively sponsored the establishment in 1991 of a national association of private farmers and cooperatives. The national association rapidly proceeded to establish a network of local associations at the province and district level, whose function was to develop “trading firms” to facilitate input purchases by member farms. Another, perhaps even more effective, strategy to deal with difficulties caused by imperfect markets is through grassroots cooperation among private farmers in rural communities. Indeed, the fledgling private farm sector is developing some 11 Agricultural Cooperatives in Transition Countries cooperative structures. Private farmers are beginning to share machinery and equipment, to cooperate in purchasing supplies and marketing of products, to pool their land resources in order to achieve more efficient cultivation, and even to establish joint “industrial” enterprises to augment their income from agriculture. In some cases, this cooperation is strictly informal, encompassing a number of members in a loose collaborative arrangement. In other cases, private farmers form an association of agricultural producers: each farm retains its identity, but all farms cooperate in provision of services, where economies of size and the effect of pooling resources are most pronounced. In the Western paradigm, this is an association of private producers supported by service cooperatives. To be effective, local cooperation must encompass as a minimum the critical areas of finance, marketing, and technical services. World Bank surveys conducted in 1992–1994 have shown that around 80% of both Russian and Ukrainian private farmers participated in some form of joint activity in provision or use of farm services. The main areas of cooperation with other farmers were production, marketing, input supply, use of machinery, and provision or receipt of credit, where the participation rates were 30% to 40% of respondents in Russia and only slightly lower in Ukraine. Cooperative processing is still undeveloped, but the observations for two successive years in Russia seem to indicate that this cooperation was increasing. More than half the private farmers in the surveys cooperated in their use of consulting services, although this was not a major input. The transition of the former Soviet agriculture to a market economy led naturally to the creation of several kinds of cooperatives. Unlike the former collective farms, these were true cooperatives in the sense that they were created voluntarily, ensured free exit of the members, and were governed by a democratic process relatively free of government intervention in operating decisions. The emergent organizational forms covered a range of alternative structures, from new production cooperatives that were created by reorganization of collective farms into smaller units based on private ownership, through voluntary associations of independent farmers seeking safety in cooperation, to service cooperatives established by various local producers. This volume presents an overview of cooperative development in some countries of the former Soviet Union, including a description of the so-called Soviet model of agriculture that prevailed before the onset of transition to market economy. 12 2. Scope for Cooperation in the Former Soviet Union Csaba Csaki and Zvi Lerman (1990-1991) Privatization of agricultural production is one of the components of transition to the market in the countries of the former Soviet Union. Yet there is strong evidence in the press and from field interview that most Russian rural residents say that they are not ready for independent farming. Their reluctance is understandable in view of political uncertainty, the inadequacy of infrastructure, and almost total absence of market structures. This appears to provide an opportunity for the development of Western-style cooperative organizations, whose function is often described in economic theory as correcting for market failure, that is, enabling producers to function even in the absence of fully developed markets. In the West, service cooperatives, which specialize in provision of agricultural inputs and marketing of agricultural products are the dominant form of this type of organization. In addition to correcting for market failure, service coops also strive to maximize economies of size by organizing their facilities on a regional basis, and not village by village. Thus, an input-purchasing cooperative will centrally purchase fertilizers for all the farmers in the region, and not just for one village; a grain elevator will serve all the grain producers in the region; and a dairy cooperative will send trucks to collect the milk from farms in many different locations in its region. Cooperatives are created to serve the needs of their member-owners. A unique feature of the cooperative is the “one man, one vote” principle: the power of a member is not a function of the member’s investment in the cooperative. Moreover, the current benefits are distributed to members on the basis of “patronage,” meaning the amount of business done with the cooperative, and not on the basis of investment in the organization. This feature increases the incentive 13 Agricultural Cooperatives in Transition Countries for the member to use the cooperative. These features clearly differentiate between the private firm and the cooperative. The objective of the latter is not to earn profits but to provide member services. A cooperative can be characterized as a “user-owned” organization, contrary to the traditional “investor-owned” firm. Production cooperatives are not widespread in the World. Production should be private: on private farms, in private dairy enterprises, and so forth. To avoid misunderstanding, we should stress that when a group of former kolkhoz or sovkhoz members take over a large-scale dairy or poultry complex through share swapping, creating what is conventionally known in Russian terminology as a “cooperative”, in fact they form a private partnership, in which the power of each partner is proportional to that person’s investment (share of assets). But beyond production, there is a large scope for the creation of cooperatives that will serve all the villages within the scope of a former kolkhoz and sovkhoz organization. Service cooperatives can be organized if former kolkhoz and sovkhoz members decide to pool asset shares, instead of swapping them with others. In this way, all the farmers in the region can form, for example, a trucking cooperative. The function of this cooperative would be to collect the produce from the member farms and to take it to the nearest distribution center or market in the city. In the absence of distribution centers or organized food markets, the cooperative may actually undertake to sell the produce to the end users in the cities (a “marketing cooperative”). The same trucks can be used to carry agricultural inputs from suppliers to the rural region (a “supply cooperative”). All this would relieve the waste of farming time that farmers usually associate with marketing and purchasing. It also ensures more efficient use of trucks for carrying larger loads. The trucking cooperative of course would need garages for the vehicles, as well as storage facilities for produce collected from the farms and especially for inputs purchased from suppliers. These also can be created by the pooling of “building shares” distributed to the members or alternatively by buying the required assets for cash. A farmer without any “truck shares” can join the cooperative by paying a certain entrance fee - “buying a share” in the cooperative. In principle, such cooperatives should be allowed to coexist with private trucking companies formed by individuals through share swapping with others. Competition between cooperatives and private firms in the same line of business would be beneficial to the producers and would ensure the most efficient use of resources. Cooperatives also can be established to develop local and regional infrastructure, especially if it is not developed by the state. One of the major needs in rural areas is the construction of farm access roads. Building roads is, of course, a responsibility of the state, but as an interim solution this function may be 14 2. Scope for Cooperation in the Former Soviet Union fulfilled by a road construction and maintenance cooperative that could be organized by all the farmers in the region. It is important to stress that even farmers in central villages that have all-weather access roads would be invited to join this cooperative: their roads will soon need maintenance and repair, which could be accomplished by the cooperative. In the cooperative paradigm, the reorganized agricultural system that would emerge from the former kolkhozes and sovkhozes can be viewed as an extension and a modification of the Israeli moshav model. Private agricultural production, based both on family farms and on larger multifamily enterprises, would be supported by a range of service cooperatives whose function will be to correct for market failure and to exploit economies of size. These cooperatives may be responsible for agricultural machinery, for purchase and delivery of agricultural inputs, and for shipping out and marketing of agricultural products. The service cooperatives may be organized regionally by function and enterprise, as is common in Western countries: dairy cooperatives, poultry cooperatives, grain cooperatives, fruit and vegetable cooperatives, and so forth. Another very important function of the cooperatives would be to provide accounting, financial, and professional services. If not done by private individuals, as described in the previous section, these services would have to be provided by a “consulting” cooperative, which would be established by the producers, like any other regional service cooperative. The main difference, however, is that instead of paying for inputs, trucking, or use of machinery, the producers would pay for professional and administrative services provided by experts, who in turn would receive a salary or a retainer from this cooperative. The experts themselves are not members of the cooperative: they are resources employed by the cooperative. In the present environment of high uncertainty and inadequate market structures, regional service cooperatives may provide the necessary reinforcement and backing to the emerging private sector in Russian agriculture by imbuing the new farmers with a sense of collective strength and shielding them to a certain extent from market imperfections. The establishment of service cooperatives should not rule out the establishment of private firms in the same lines of business. Competition between the two forms of organization would only improve the economic efficiency of the system by providing the producers with a greater variety of options. 15 3. Land Reform and the Future Role of Cooperatives in Agriculture in the Former Socialist Countries in Europe Csaba Csaki and Zvi Lerman (1992) The former European socialist countries, including the Soviet Union and the countries of Central and Eastern Europe, are undergoing a fundamental economic and political transformation. Far-reaching changes that surpass all previous reform attempts are taking place in the agrarian economy of these countries, where the creation of a new agricultural structure based on private ownership, true cooperatives, and a market economy has begun. All the countries in the region are striving to overcome serious economic difficulties with comprehensive political and economic reforms. They are in a process of transition: many details have yet to be clarified, especially in the former Soviet Union, and there is much uncertainty regarding the future. These changes will fundamentally reshape agriculture in the region and deeply affect its functioning and its role in international agrarian relations. The transition from socialist to market-based agriculture is a complex and multi-faceted process that raises many difficult questions. The major issues include privatization of land and other productive assets, development of a new incentive framework, establishment of a market-controlled system with a working market for agricultural inputs and products, redefinition of the role of government in agriculture, and implementation of appropriate institutional changes and reforms. These topics have been examined in the literature in various forms and contexts (see a selection of relevant sources in References), but there are no textbook solutions and the process of transition is shrouded in uncertainty. The next few years will be characterized by fluidity and change as the former socialist countries move toward new goals and structures while simultaneously searching for their own solutions, possibly taking account of the diverse world experiences. 16 3. Land Reform and Future Role of Cooperatives in Former Socialist Countries in Europe Analysis of alternative trajectories of change is an important and timely task that can help decision-makers to formulate relevant policies. The objective of this paper is much more modest. We focus on the process of change as it is actually unfolding in the former socialist countries and provide a comparative review of two main issues: an account of the land reform process and an overview of the attempts to restructure and privatize the collective and state farms, with a special reference to the future role of cooperatives. Common Heritage of Socialist Agriculture Agriculture in all former socialist countries in Europe was organized on similar principles of a centrally planned economy, with a pervasive administrative command system. All these countries shared the same philosophy of managing agriculture, with an emphasis on low prices and correspondingly low wages. The philosophy of controlling agriculture by plans and administrative commands created a farming structure based on dominance of large-scale farms, although the concrete solutions differed across countries. Collectivization The agrarian structure of the region was shaped by the collectivization process. It began in the Soviet Union in 1928-1929 and was copied to the countries of Central and Eastern Europe after World War II. Table 3.1 shows some major indicators of large-scale socialized farming in the European socialist countries. Table 3.1. Number and average land size of socialized agricultural organizations (1985 data) State farms Farms Average area, ha Farms Albania 70 2,400 420 Bulgaria* 536 9,692 NA CZSK 226 6,204 1,677 GDR 465 945 3,904 Hungary 128 1,270 4,195 Poland 1,258 2,665 2,342 Romania 419 4,895 4,363 USSR 22,690 16,051 26,660 * Total number of agricultural units in 150 agroindustrial complexes. Source: Cochrane (1989). Collective farms Average area, ha 1,270 NA 2,605 1,370 7,598 297 2,093 6,370 Collectivization of agricultural production was promoted as a means of achieving central management (it also, of course, ensured political control). In the Soviet Union, farm enterprise collectivization was originally designed to extract food from rural areas for increasingly industrialized urban centers at low cost; a 17 Agricultural Cooperatives in Transition Countries corollary purpose was to allow mechanization to capture supposed economies of scale in farming. While 97% of all agricultural land in the Soviet Union was farmed individually between 1917 and 1928, rapid collectivization after 1928 virtually eliminated individual farming; by 1940, 97% of all farms in the USSR were worked collectively. The only remnants of individual farming were the tiny household plots that collective farm members were allowed near their dwellings for “individual subsidiary farming”. Table 3.2. Percentage of socialized agricultural land in the former socialist countries (1985 data, including household plots) Country Percent of total agricultural land Albania 100.0 Bulgaria 99.6 Czechoslovakia 94.9 GDR 95.0 Hungary 92.5 Poland 27.9 Romania 90.5 USSR 99.9 Source: Cochrane (1989). Collectivization in the socialist countries of Central and Eastern Europe after World War II pursued similar objectives. In most countries in the region, 90100% of all agricultural land was ultimately (mid-1980s) organized in socialized, state and collective, farms (Table 3.2), although there were local differences in execution and different structures emerged across the region. In GDR, Czechoslovakia, Bulgaria, Romania, and Albania the socialist reorganization of agriculture adhered to the Soviet model: the typical form of agricultural enterprise was the large-scale state or collective farm of several thousand hectares. In Bulgaria, state and collective farms were subsequently merged into agroindustrial complexes. In mid-1980s, 150 giant complexes were operating in Bulgaria, spanning most of the agricultural land. In GDR, a particular characteristic of collectivized agriculture was the separation of crop and livestock production systems. In Albania, collectivization was even more extreme than in the Soviet Union: all private activity in agriculture, even household farming, was banned and remained forbidden for a long time. In Hungary, on the other hand, collectivization was characterized by relative independence of the large-scale agricultural cooperatives and small subsidiary household farms prospered within the cooperative structures. Finally, Poland was the only socialist country in Europe that escaped total collectivization: here less than 30% of land had been collectivized and private farms retained their predominance, but the government impeded their progress for a long time. 18 3. Land Reform and Future Role of Cooperatives in Former Socialist Countries in Europe Outside of Poland, few classical private farms survived the reorganization of agriculture. The private sector was driven to the fringes of the economy. However, despite the virtually total absence of a traditional private farming sector, individual production survived in all countries (except Albania) in the form of household farms with part-time farming. The subsidiary household farms in the former Soviet Union and in Hungary consistently accounted for around 30% of total agricultural product. In Bulgaria, individual farming contributed about 25% of total agricultural product. The rate of private production was the lowest in Czechoslovakia and the former GDR (about 10%). No reliable figures are available for Romania. The small private producers specialized primarily in laborintensive enterprises, such as livestock and vegetables, while grain and other scale crops were concentrated almost exclusively in the capital-intensive socialized farms. The political attitude toward these semi-private farming activities changed frequently. It is only in Hungary that subsidiary household farming was tolerated continuously and often even supported by the socialist system. Land Ownership Collectivization of agriculture was implemented against a backdrop of changes in land ownership relations and policies. In the Soviet Union, all land was nationalized within days of the October 1917 revolution. After that, state land was given to farmers in lifetime use and no private land ownership was recognized. Albania also nationalized land following its transition to a socialist regime after World War II. In general, however, land in Central and Eastern Europe was not nationalized after World War II, although it was subsequently collectivized. In addition to state property, cooperative or collective land ownership thus emerged, while private land also continued to exist in various forms, especially in Hungary, Poland, and Czechoslovakia. Traditional municipal ownership of rural land for common pasture and social infrastructure totally disappeared. Although private land ownership was preserved in some countries, property rights became a mere formality over the years. Land markets were abolished and agricultural land lost its character as a means of production with a clear money value. The value of land was not listed in the registry of agricultural implements, nor was the price of land calculated among the production costs. 19 Agricultural Cooperatives in Transition Countries Need for Reform Decades of socialism manifested in central planning and administrative commands produced a similar legacy for agriculture in the Soviet Union and in the countries of Central and Eastern Europe: N large, inefficient farms with high production costs, suffering from lack of individual initiative and “free rider” attitudes; N elimination of all incentives for efficiency improvement through institution of cost-based procurement prices and deeply subsidized unrestricted credits; N food price subsidies, producing an excess demand for food at the subsidized prices and a high level of food consumption relative to countries of comparable prosperity in market economies; N pervasive monopoly of the state in food processing and distribution and in farm input supply, leading to destruction of economic intermediation mechanisms and total dependence of producers on centrally allocated inputs; N macroeconomic distortions, including a chronic budget deficit, inflation, and mounting foreign debt. This negative legacy is a natural consequence of the ideological goal of controlling all agricultural production, distribution, and consumption. The economic distortions introduced by the administrative command system became apparent fairly early and triggered periodic reform attempts across the region. However, the weakness was endemic to the system: the various reform attempts failed to resolve the major shortcomings of the system and to produce the desired improvements in agricultural performance. Instead of creating a better system of socialist agriculture, the central command system collapsed between 1989-1991. Following the political changes in socialist Europe in 1989-1991, efforts to create a completely new agrarian structure replaced the superficial, cosmetic reform attempts. The political tide that swept Central and Eastern Europe in 19891990 and the August 1991 events in the Soviet Union signaled the beginning of a new era also for agriculture. The change is most discernible in the former GDR, Hungary, Poland, and Czechoslovakia, where the introduction of a true multiparty system ended the communist monopoly. Changes are also occurring in Romania, Bulgaria, and Albania, but agricultural development is more uncertain in these countries because the post-communist parties, although still fairly stable, appear to be losing their power. The dissolution of the Soviet Union has created the political conditions for a real change in agriculture. However, a detailed 20 3. Land Reform and Future Role of Cooperatives in Former Socialist Countries in Europe agenda for the transformation of Soviet agriculture began to emerge in the former republics only in the first half of 1992, and consistent strategies for agricultural transformation still do not exist. Land Ownership Reforms One of the most debated political and economic questions in the region concerns land ownership and the creation of land markets. The land reform process involves three distinct issues: N the establishment of a legal framework for private land ownership and land markets; N the decision on actual eligibility and allocation of land to new owners; N the creation of a new farming structure, including the restructuring of existing large-scale farms in line with the new ownership patterns and the principles of a market-based economy. At the very beginning of the transition to new political and economic conditions in the region, several proposals were made to change the inherited land ownership and tenure structure. The main alternative proposals were the following: N retain the state ownership of land and allow individual use of land through leasing; N make the land the property of those who wish to pursue agricultural production, while limiting the right to sell and lease out the land during a certain transition period; N allow private ownership of land by farmers without any restrictions on immediate sale or leasing; N grant land ownership based on pre-collectivization property rights to those who want to farm and compensate financially the previous owners who are not active farmers; N restore pre-collectivization land ownership relations without any restrictions; N treat land ownership as an integrated element of an overall compensation and privatization package. These multiple possibilities are further complicated by the issue of payment for land: should land be granted free to eligible individuals or should they be required to pay. Issues of former ownership and restitution are relevant mainly for the “western” countries in the region, where private land ownership existed 21 Agricultural Cooperatives in Transition Countries until after World War II and the original land owners or their descendants are identifiable to this day. In the former Soviet republics, where the traditions of private ownership were never strong, the major issue is eligibility and the pattern of distribution: should land be given to everybody or only to those who currently work the land; should there be a ceiling on land holdings or should an individual be allowed to own any amount of land. During 1991-1992, land ownership has been the focal point of heated political debate throughout Central and Eastern Europe and in the former Soviet Union. Legislation related to land has been passed in Romania, Bulgaria, Hungary, Czechoslovakia, and Albania. All these laws recognize private land ownership. In the USSR, the 1991 Union-level land legislation was followed by detailed “land codes” in the former republics, but full unrestricted private land ownership has not yet been fully accepted in most republics (including the trail-blazing Russia). The legislation outside the former Soviet Union also recognizes the rights of landowners immediately prior to collectivization, and the laws establish a procedure, which differs across countries, for reinstating property rights. Among the former Soviet republics, reinstatement of pre-collectivization ownership and compensation of former landowners is in process only in the Baltics; the issue is being debated also in Western Ukraine and Belorus. In Romania and Bulgaria, households can claim a limited area of land based on certain supporting evidence. In Romania, the restitution of former land ownership was implemented fairly quickly, without any intention of creating farms of optimal size or determining how farmers will produce after the land is distributed. The Bulgarian approach attempts to construct appropriate holdings through administrative assignment. Although this method is intrinsically slow, political tension delayed almost any implementation for a long time. It is only after September 1992 that the new non-communist Bulgarian government decided to speed up the process. In Albania, most of the nationalized land was distributed to individuals in 1991, although the legal framework of land ownership is still not fully in place. In Hungary, the initial attempt in 1990 to return agricultural land to prior owners was blocked by the Constitutional Court, which ruled that land ownership must be treated like other assets. In 1991, landowners and dispossessed owners of other property received vouchers redeemable for agricultural land and other assets, which essentially gave monetary compensation to prior owners. Land auctions are being organized by government agencies, providing voucher holders and others with an opportunity to purchase land. This strategy may lead to accumulation of farmland in the hands of non-farmers and even non-rural residents. Landowners who continued to hold title to land managed by 22 3. Land Reform and Future Role of Cooperatives in Former Socialist Countries in Europe cooperatives were granted unconditional restitution of their ownership rights. In Czechoslovakia, the law mandates return of agricultural land to prior owners who are willing to cultivate it. Only modest interest in reclaiming land has been reported thus far. In Poland, where most of the land has always remained in private ownership and use, the future of state farmland (about 20% of the total) is only now beginning to be discussed. Land ownership issues are more complicated in the former USSR, where land was nationalized back in 1917 and farming was subsequently collectivized. In Russia, the presidential decree on the continuation of land reform (December 1991) took substantial steps toward the establishment of private land ownership. Other republics have adopted similar decrees. However, further legislation is still needed in most republics, including Russia, to establish full-fledged private land ownership with unrestricted rights to sell and lease out land. Russian legislation recognizes three categories of land ownership: state, private, and municipal land. Some republics, however, have an additional category of collective or cooperatively owned land. This unusual ownership category is justified by the requirements of the transition from state to private property, but there is a danger that it will be perpetualized and thus obstruct full-fledged privatization of land and development of market relations. The existing legislation and government policy in most former Soviet republics intends to keep private agriculture as a supplementary component of a farming structure based on large-scale farms. The establishment of private agriculture and the implementation of land reforms are proceeding along these lines. Land-reform legislation in Russia and other republics recognizes two sources of land for distribution: state reserve land for establishment of new private farms and the land of large-scale farms for expansion of subsidiary household holdings and for allocation to members. Substantial land reserves, however, exist only in Russia, where 14 million hectares are available from this source. In other republics, there is virtually no uncultivated land and reserves had to be created by expropriating 15-20% of the farmland from collective and state farms. In the former Soviet Union, an individual can receive a parcel of up to 50 or 100 hectares of land simply by writing an application to the local authorities (some evidence of agricultural background or education is required as an eligibility criterion). Land is distributed without any payment, but with a fairly long moratorium (five to ten years) on the right to sell and lease it out. Since the per-capita available land in collective and state farms is much less (4-10 hectares per person depending on local conditions), this distribution policy creates potential equity problems between new farmers and members of large-scale farms, who are entitled in law only to their share of the socialized farm land. Land 23 Agricultural Cooperatives in Transition Countries is divided between members of collective and state farms in the form of “conditional shares.” This process normally does not involve physical allocation of land, although in some exceptional cases large-scale farms have been known to divide their land in physical form to the members. To get his land, the individual normally must leave the collective or state farm and become an independent private farmer. The Future of Large-Scale Farms The land reform process has focused the attention on the restructuring of collective and state farms, which are the main source of land in all countries of the region, except Poland. The large-scale socialized farms are not suited for efficient operation under market conditions, and their reorganization is a necessary step in the transition to a market-based economy. Structural and organizational reforms in the collective and state farm sector began independently of land reform legislation almost a decade ago. With time these changes became more inventive and diverse, and they are now taking several different forms, all of which can be observed simultaneously: (a) expansion of individual subsidiary farms within the existing structure of large-scale collective and state farms and their organization into “small cooperatives” of several neighboring families; (b) creation of “lease cooperatives” as comparatively independent profitoriented subdivisions of existing collective and state farms; (c) conversion of collective and state farms into associations of farmers, agrofirms, and joint-stock societies; (d) separation of individual peasant farms or cooperatives from the existing large-scale farming structure; (e) complete dismantling of large-scale farms followed by total privatization of their land and assets. Although the reorganization began as a spontaneous process, later legislation adopted in 1990-1992 made the restructuring of large-scale farms compulsory in most cases. The legislation provided a general framework for the distribution of land and assets in large-scale farms, but left the responsibility for making the final choice of new structure with the members. In principle, none of the specific forms of farming structure is imposed by legislation upon the members. Restructuring of the farm sector is an ongoing process and its final results will be different in different countries. In Central and Eastern Europe, this process will radically reshape the farming structure, although the majority of members 24 3. Land Reform and Future Role of Cooperatives in Former Socialist Countries in Europe probably will not opt for fully independent private farming. In the former Soviet Union, the latest statistics indicate that a large proportion of collective and state farms are undergoing some form of reorganization and restructuring, but very few large-scale farms actually dissolve and break up into totally independent private farms. Most of them continue to exist as “federated” structures or “associations of producers”. Here one of the factors keeping the individuals together is the developed social infrastructure created and maintained by the collective and state farms. Further economic reorganization of the agricultural sector in the former Soviet republics must find acceptable solutions to the problem of social assets, for instance, by entrusting them to the care of local municipal authorities, supported by sufficient budgets and taxes. Lease Cooperatives and Shareholder Structures Back in the 1980s, the collective and state farms began to entrust well-defined productive “subdivisions” to the virtually complete responsibility of workers’ teams. This created a direct link between the workers and the results of their labor and increased the motivation and involvement of the individuals in the final outcome of the enterprise. These new agricultural structures gradually developed into independent cost centers within large-scale farms, and some of them recently began incorporating as independent legal entities. This process automatically induces a natural de facto transformation of the traditional centralized large-scale farm into a “federated” structure or an “association of enterprises”, even without deciding any of the ownership issues. The intrafarm lease groups, even when incorporated as independent legal bodies, continue using the central office for a variety of professional services, including accounting and finance. Since independent purchasing and marketing is often impracticable within the existing system, the independent groups “sign contracts” with the central office for these services. The central office usually receives a certain share of the group profit as a “management fee”. The privatization legislation and pressures to reorganize have spurred the creation of independent lease cooperatives as legal entities outside the existing farming structure. These cooperatives are formed by a number of persons who lease some of the land and other assets of a collective or state farm. They sometimes extend their activities beyond traditional livestock and field crop operations by establishing regional services, such as a repair shop, a garage, a transport service, a construction team, or even a road-building team. These services are particularly important for independent farmers in the area, but are also useful to collective and state farms that may face difficulties as a result of breakdown of state-monopolized services. 25 Agricultural Cooperatives in Transition Countries In the former Soviet republics one of the current options for farm enterprise restructuring is by division of land and other assets into “conditional shares.” These are certificates attesting the share of the individual in the total assets of the farm, without attempting physical division of the assets. The introduction of asset shares strengthens the independent business orientation and profit motivation of the intrafarm lease groups. The workers of each group naturally pool their shares and invest them in the “common business.” Thus, in addition to getting their wages from current proceeds, they also receive a share of the group’s residual profit at the end of the year. Other members, in particular pensioners, can “invest” their shares in productive subdivisions of their choice and thus enjoy “dividends” while remaining “passive shareholders.” In the future, this form of organization may actually develop into a common-stock corporation once share tradability and management issues are resolved. Meanwhile, however, many collective and state farms in the former Soviet republics are reorganizing as “joint-stock societies,” although their shares are not tradeable and not transferable. These joint-stock societies are similar in concept to the labor-managed firms in Yugoslavia or to the companies that were managed by so-called enterprise councils in Hungary. These labor-managed structures, once very popular outside the agricultural sector, have largely failed in Eastern European countries. While better than the traditional administrative-command structure, this form of organization is inefficient in the long run because of pervasive free riding and lack of a real feeling of ownership and involvement. Also, the short-term consumption preferences of the worker-owners may prevail and long-term capital investments may be neglected. The decision processes in such organizations are diffuse, it is impossible to assign individual responsibility, and the worker-owners continually press the “friendly” management for higher salaries and greater social benefits without greater personal productivity. The relative popularity of joint-stock societies among the reorganizing collective and state farms in the former Soviet Union thus gives reason for concern. In Central and Eastern Europe, on the other hand, the implementation of recent legislation creates clear personal ownership of all collective farm assets, including land. The new owners are free to make decisions concerning their property, and they may decide to pool their property in the form of a corporate shareholding structure. These new enterprises bear all the features of Western-type shareholder corporations with transparent and open ownership structure and separation of management and employment. Because of the size of the agricultural sector in the region and the sheer number of enterprises involved, the reform is slow and difficult. Yet the restructuring of large-scale farms is a sweeping process that seems to be moving forward at an 26 3. Land Reform and Future Role of Cooperatives in Former Socialist Countries in Europe accelerating rate. Recent statistics on leasing indicate that 63% of all collective and state farms in Russia employ some form of lease contracts with producers and as many as 9% of the farms have instituted lease arrangements in all their enterprises as of January 1, 1991 (up from 3.8% on January 1, 1990). Leaseholders in all categories account for 25% of workers in collective and state farms in Russia as of January 1, 1991 (up from 15% on January 1, 1990). By April 1, 1992, 15% of Russian collective farms and 6% of state farms had decided on their reorganization mode in line with recent legislation: most of them chose to reorganize as associations of farmers or as joint-stock societies, without dismantling. In the Ukraine, nearly one-quarter of collective and state farms had reorganized in one form or another by mid-1992, and it was expected that over 50% of collective farms and 30% of state farms will have gone through some form of reorganization by the end of 1992. Restructuring of farm enterprises is also advancing in all other countries across the region. What will be the future of collective and state farms in the transforming agricultural economy of the former socialist countries in Europe? In their traditional form, these farms are not suited for the market economy: they are too large and lack profit orientation. In the early stages of the transition, these largescale farms were expected to dissolve and disappear. It is now clear that a high proportion of collective-farm members do not wish to pursue completely independent farming, at least not in the short run. They want well-defined and freely transferable ownership rights and autonomy, as long as these are supported by the protective net of cooperation. Thus, probably only a small proportion of large-scale farms will be completely dismantled. New forms of cooperatives will emerge, focused not on production but primarily on services, processing, and marketing. This looser form of cooperation will probably pave the way for the ultimate shift to individual farming at a later stage. First Experiences with Private Farming and Farm Enterprise Restructuring A new phenomenon in agriculture in the former socialist countries is the development of peasant farms outside the traditional framework of large-scale collective and state farms. As indicated previously, the creation of these non-collective farms was enabled by special legislation adopted by different countries in 1990-1991. They are widely promoted by the governments and receive generous financial support. The number of individual peasant farms is increasing at an impressive rate. Thus, in Russia the number of individual peasant farms increased from 231 farms 27 Agricultural Cooperatives in Transition Countries in April 1990 to nearly 35,000 farms in November 1991 and over 120,000 farms in June 1992. In Ukraine, the number of private farms increased from 2000 in 1991 to 10,000 in the autumn of 1992. These farms are quite small, however: an average of around 40 hectares in Russia and 20 hectares in Ukraine (compared to several thousand hectares in an average collective or state farm). Despite the impressive growth, they still account for a minute percentage of agricultural product in most countries. Apart from Poland, the only exceptions are countries like Albania, Armenia, and Romania, where the level of collective agriculture had never been very advanced and the collective farms were completely dismantled soon after the change of the political regime. In these countries, however, the private farms exist on the level of subsistence agriculture, similarly to the private farms in China. New farms are often created by persons not immediately employed in agriculture. In Russia, according to June 1991 data, only about 30% of all private farmers are former members of collective and state farms; the remaining 70% are from the cities, although the law requires that to be eligible for allocation of farming land they must have some agricultural background or at least training. Thus, in Russia as in other countries of the region, farmers are not rushing to take advantage of the new legislation which allows them to receive land for independent individual farming. The conditions for fully independent private farming beyond the level of subsistence agriculture and local markets still do not exist in most countries. Indeed, difficulties with availability of agricultural machinery, input supply, and product marketing are cited as the main reasons for the reluctance of members of collective and state farms to switch to independent farming. There are practically no input supply and product marketing channels outside the rigid state monopoly. There is no network of rural shops that sell inputs and implements to private farmers and no system for farm-level purchase or wholesale of agricultural products. The existing auctions, exchanges, and farmers’ markets, and insufficient to handle the full volume of agricultural product. The transportation system is inadequate. Technical services and equipment are hardly available for private farmers. There is no commercial credit and banking system to finance independent farming operations. Above all, cooperative members and state farm employees have a very limited knowledge of business operations, financing, accounting, taxation, and risk management. Because of these obstacles, cooperation among private farmers is essential - in finance, in marketing, in technical services. The model of division of large-scale farms into smaller profit-motivated functional units supported by cooperative services appears to provide a fairly 28 3. Land Reform and Future Role of Cooperatives in Former Socialist Countries in Europe faithful generalization of the diversity of reorganization modes which are occurring in the agricultural sector all over the region. The fledgling private farm sector, which basically represents the extreme form of division to the stage of total separation from the large-scale farm, is also beginning to develop some cooperative structures. Private farmers begin to realize that totally independent individual farming is very difficult, especially in the present economic environment. They begin to share machinery and equipment, to cooperate in purchasing of supplies and marketing of products, to pool their land resources in order to achieve more efficient cultivation, and even to establish joint “industrial” enterprises to augment their income from agriculture. We are thus witnessing a confluence of two streams in agriculture: large-scale farms split into smaller units supported by cooperative structures, while small-scale individual farmers go through a process of cooperativization creating functionally similar support structures. This suggests that Western-type service cooperatives will play an important role in the future of the farming sector in the region. Role of Western-Type Service Cooperatives While full privatization of agricultural production is legally and economically feasible, there is strong evidence that most rural residents in the former socialist countries admit that they are not ready for independent farming. Their reluctance is understandable in view of political uncertainty, the inadequacy of infrastructure, and almost total absence of market structures. This appears to provide an opportunity for the development of Western-style cooperative organizations, whose function is often described in economic theory as correcting for market failure, that is, enabling producers to function even in the absence of fully developed markets. Production cooperatives are almost unknown in the West (with the notable exception of Israel). Indeed, European experience suggests that production cooperatives are not a very successful and efficient form of organization. Production should be private: on private farms, in private dairy enterprises, and so forth. But beyond production, there is a large scope for the creation of cooperatives that will serve all the villages within the scope of a former largescale farm. Service cooperatives, which specialize in provision of agricultural inputs and marketing of agricultural products, are the dominant form of cooperation in the West. In addition to correcting for market failure, service coops also strive to maximize economies of size by organizing their facilities on a regional basis, and not village by village. The establishment of service cooperatives relieves the 29 Agricultural Cooperatives in Transition Countries farmers from the responsibility for marketing and purchasing activities and enables them to concentrate on production. Service cooperatives often establish processing facilities, which avoid exploitation of farmers by private enterprises and improve members’ welfare through vertical integration into value-added processing. Cooperatives also can be established to develop local and regional infrastructure, especially if it is neglected by the state. Another important function of cooperatives may be to provide accounting, financial, and professional services. These “consulting” cooperatives will build on the considerable knowledge and experience of the qualified experts and managers currently employed by the large-scale farms. Instead of paying for inputs, trucking, or use of machinery, the producers will pay for professional and administrative services provided by experts, who in turn will receive a salary or a retainer from the cooperative. The experts themselves are not members of the cooperative: they are the resources employed by the cooperative. In the cooperative paradigm, the reorganized agricultural system that would emerge from the former large-scale farms can be viewed as an extension and a modification of the Israeli moshav model. Private agricultural production, based both on family farms and on larger multifamily enterprises, will be supported by a range of service cooperatives whose function will be to correct for market failure and to exploit economies of size. These cooperatives may be responsible for agricultural machinery, for purchase and delivery of agricultural inputs, and for shipping out and marketing of agricultural products. The service cooperatives may be organized regionally by function and enterprise, as is common in Western countries: dairy cooperatives, poultry cooperatives, grain cooperatives, fruit and vegetable cooperatives, and so forth. New private service cooperatives can be based on the core of the existing cooperative farms. Farmers should be free, however, to choose the forms of cooperation they prefer, and the new cooperation must be based on private ownership and competition. In the present environment of high uncertainty and inadequate market structures, regional service cooperatives may provide the necessary reinforcement and backing to the emerging private sector in the former socialist countries by imbuing the new farmers with a sense of collective strength and shielding them to a certain extent from market imperfections. The establishment of service cooperatives should not rule out the establishment of private firms in the same lines of business. Competition between the two forms of organization would only improve the economic efficiency of the system by providing the producers with a greater variety of options. 30 3. Land Reform and Future Role of Cooperatives in Former Socialist Countries in Europe There is no experience with private cooperatives in the former socialist countries and only limited information is available on this subject. The establishment of the new cooperatives therefore should be supported by the government as a public good. International aid may be appropriate in this area in the form of training programs and direct technical assistance. Promotion programs (advice, technical assistance, etc.) also should be organized to help farmers who opt for fully independent farming. Conclusion Land-reform and privatization legislation in the former Soviet Union and in Central and Eastern Europe has opened possibilities for the development of private family farming. Members of collective and state farms, however, are not rushing to leave the large-scale socialized structures and establish independent farms on private land. Instead, the large-scale farms are reorganizing into smaller and more efficient productive subdivisions whose assets and profits are owned by the team members and which continue to rely on cooperative supply, marketing, and financial services provided by the central farm structures. The new independent farmers are also forming cooperative organizations to help them overcome the difficulties caused by nonexistence of input and product markets. The farming structure is developing toward private production, both in family farms and in larger multifamily enterprises, which may be supported by a net of service cooperatives. The process of private farm development in the former Socialist countries is taking a course which seems to be different from the original expectations of many Western observers. It is already quite clear that rapid full-fledged privatization will not take place in the region, with the exception of only few countries. It is also quite probable that Western-type family farms will not be the major farming structure for a long time to come. Private farms in the former Socialist countries will probably evolve toward two extremes: either small subsistence farms with little commercial agriculture or relatively large diversified agribusinesses with several hundred hectares of farmland and processing facilities. The major agricultural structure in these countries in all probability will be based on various forms of private-owned cooperatives. References Braverman A. and J.L. Guasch. 1990. “Agricultural Reform in Developing Countries: Reflections for Eastern Europe,” American Journal of Agricultural Economics, 72(5): 1743-1751. 31 Agricultural Cooperatives in Transition Countries Brooks K. 1991. “Decollectivization and the Agricultural Transition in Eastern and Central Europe,” Policy, Research, and External Affairs Working Papers WPS 793, The World Bank, Washington, D.C. Brooks K., J.L. Guasch, A. Braverman, and C. Csaki. 1991. “Agriculture and the Transition to the Market,” Journal of Economic Perspectives, 5(4): 149-161. Cochrane N.J. 1989. Agricultural Statistics of Eastern Europe and the Soviet Union, 1965-85, USDA Economic Research Service, Statistical Bulletin No. 778, Washington, D.C., July. Csaki C. 1990. “Agricultural Change in Eastern Europe at the Beginning of the 1990s,” American Journal of Agricultural Economics, 72(5): 1733-1742. Csaki C. 1991. “Agriculture and Agricultural Policy in Eastern Europe,” in: Agricultural Economics and Policy: International Challenges for the Nineties, Elsevier, Amsterdam. Kovacs, J.M. and M. Tardos, eds. 1992. Reform and Transformation in Eastern Europe: Soviet-Type Economies on the Threshold of Change, Routledge, London. OECD. 1991. The Soviet Agro-Food System and Agricultural Trade: Prospects for Reform, Paris, Organization for Economic Cooperation and Development. Wadekin K.E. and J.L. Brada, eds. 1988. Socialist Agriculture in Transition, Westview, Boulder. Co. World Bank. 1992. Food and Agricultural Policy Reforms in the Former USSR: An Agenda for the Transition, Studies in Economics of Transformation Paper Number 1, The World Bank, Washington, D.C. 32 4. Transformation of Cooperative Farms in Central and Eastern Europe Zvi Lerman and Csaba Csaki (2000) Agriculture has been at the center of attention of politicians and policy makers in Central Eastern Europe (CEE) since the beginning of transition in 1989. This is attributable, at least in part, to the relatively high importance of the agricultural sector in this region as measured both by its share in GDP and, perhaps most significantly, by its share in total employment. Thus, during the 1980s, the last decade before transition, agriculture contributed nearly 20% of GDP and employed more than 20% of the labor force in most CEE countries. Czechoslovakia and Slovenia were the only exceptions, but even in these “nonagrarian” countries the agriculture’s share was around 10% of GDP and total employment. To put these numbers in perspective, they should be compared with the 15 EU countries, where the share of agriculture during the same decade was around 4% of GDP and 8% of employment. And yet the lobbying power of EU farmers is such that agricultural policy is always in the limelight of EU politics. Because of the special role of agriculture in CEE and the political prominence of this sector in the EU, it is appropriate to carry out an assessment of the changes in the structure of the farm sector in transition countries. Because of agriculture’s large share in the economy and especially in rural employment, improvements in agricultural productivity through market-oriented reforms were originally expected to act as an engine of change and growth for all sectors in the CEE countries. The transition of agriculture from plan to market is a complex multidimensional process. Land reform and restructuring of large socialized farms – the topic of our paper – are perhaps the most visible and widely discussed components of this process. Yet agricultural transition includes other essential dimensions, such as development of functioning market services (both upstream for input supply and downstream for product marketing and processing), reduction of government intervention, emergence of rural credit institutions, 33 Agricultural Cooperatives in Transition Countries technological improvement, new capital investment patterns, agricultural labor adjustment. These dimensions of change are both affected by, and impact on, the process of land reform and farm restructuring. They are moreover interrelated with political forces, democratization of society, and other profound adjustments that accompany the transition from the pre-1990 reality to the world of the 21st century. The present paper provides a status report of land reform and farm restructuring in ten CEE countries that are candidates for accession to the EU in the near future and, at the end, briefly examines the intriguing interrelationships between land reform, growth, and political factors. The Inherited System The CEE countries embarked in 1989 on a program of land reform and farm restructuring as a part of an overall strategy of transition to the market. Table 4.1 lists the main features of the inherited socialist system in agriculture, which set it apart from market-oriented agriculture and were responsible for its chronic inefficiency. Figure 4.1 illustrates the structure of land holdings in the socialist farm sector, clearly highlighting the dominance of production cooperatives and state farms and the low share of individual farming (except in Poland). The CEE farming structure on the eve of transition sharply deviated from that observed in market economies, where individual farms dominate and corporate farms are substantially smaller than the socialist cooperatives. Thus, in the USA, individual or family farms control 80% of agricultural land. Moreover, 90% of corporate farms are classified as family-held corporations, i.e., extensions of family farms incorporated mainly for tax reasons. The average farm size in the USA is less than 200 hectares, and the corporate farms (about 5% of all farming units) average about 600 hectares. The farm sizes in the EU are much smaller, with farms in the UK (the EU country with by far the largest farms) averaging 70 hectares. Table 4.1. Inherited features of socialist agriculture Attribute Shortcomings Confused ownership of land Collective organization of production Large farms (2,000 ha, 500 workers) Lifetime employment policy for farm members Centrally prescribed production targets Soft budget constraints Private ownership without real property rights; dominant state and cooperative ownership Inefficient due to free riding, moral hazard, lack of individual incentives Inefficient due to high monitoring costs, anonymity, lack of transparency Inefficient due to inability to control costs by adjusting labor Inefficient due to lack of consumer orientation, insensitivity to market signals Inefficient due to lack of profit orientation, reliance on writeoffs and subsidies 34 4. Transformation of Cooperative Farms in Central and Eastern Europe 100% 80% 60% 40% 20% 0% Pol Czs Hun State farms Rom Lit Cooperatives Lat Est Bul Figure 4.1. Structure of land holdings in socialist farms prior to 1990. Individual The structure and organization of socialist agriculture were thus basically incompatible with a market-oriented economy. The main economic goal was to transform the agricultural sector from a centrally planned command system to a more efficient market-oriented system. This involved the need for macroeconomic and sectoral adjustments including elimination of central controls and introduction of hard budget constraints, as well as privatization of land ownership, a shift from collective to individual agriculture, and general downsizing of farms in line with the evidence of farm organization and farm sizes in market economies. In fact, the reform program was driven by a mixture of economic and political objectives. The purely economic goal of efficiency improvement was augmented by a set of political objectives, which were motivated by the desire to break with the Soviet-dominated past and do justice to the former owners, who lost their property rights after World War II. Both sets of objectives predicated a transition from collective agriculture managed through central planning to agriculture based on private property, where producers control their farming decisions in response to market incentives. The economic objectives focused on restructuring of the traditional large farms. The political objectives, in addition to justifying the elimination of production cooperatives and state farms, tilted the land privatization strategy toward restitution to former owners (rather than distribution to workers). The CEE land reform program thus involved two intertwined strands of privatization and farm restructuring, which were expected to improve the efficiency and productivity of agriculture and at the same time wipe out the main features of a politically undesirable heritage. Privatization of Land Private land ownership did not cease in most CEE countries after World War II. The only exceptions were the three Baltic states, where land was fully nationalized when Estonia, Latvia, and Lithuania were absorbed in the Soviet 35 Agricultural Cooperatives in Transition Countries Union. (Albania also nationalized the land by its 1952 constitution, but this country remains outside the scope of our discussion.) Yet even in countries outside the Baltic states, the land was predominantly cultivated by cooperatives and state farms all through the socialist era (see Figure 4.1). Despite collective cultivation, much of the land (outside the Baltics) remained nominally in private ownership, and the owners’ property was actually registered in the old cadastre, which survived the war and the socialist takeover. Some of the land reverted to cooperative ownership as former owners or their heirs left the cooperative and moved to the city (this phenomenon was particularly common in Hungary). Some of the land – primarily the land controlled by state farms – was nationalized through expropriation from large estates, the Church, Nazi collaborators, or other politically suspect individuals. Privatization of land was one of the first items on the reform agenda of all CEE governments after 1989. Who may own agricultural land in CEE? All countries allow private ownership of land by individuals, i.e., physical persons who are nationals of the country in question. Some CEE countries (Estonia, Lithuania, Hungary) prohibit land ownership by legal entities. Cooperatives, corporations, and other private companies may own non-land assets, but must lease their land resources from individual land owners or the state. Finally, most countries prohibit ownership of agricultural land by foreign residents, or severely restrict the ownership rights of foreigners. This restriction of foreign ownership is a serious obstacle in the process of EU accession, as EU laws require that there can be no discrimination in land ownership rights for all nationals of member states. The CEE countries chose to privatize land mainly by restitution to former owners. Poland is an exception to the restitution strategy, as the previous postWorld War II land reform in this country distributed most of the estate lands to smallholders. Any demand for the Polish smallholders to give up their allotments in favor of former large estate owners would be politically and socially untenable, and the state accordingly focused on privatizing, through auctions and sale, the 20% of land that had been nationalized and transferred to state farms. For similar social reasons, the CEE countries did not extend their restitution programs to ownership rights before World War II and accepted the outcomes of the land reform that was implemented immediately following the liberation from Nazi occupation after World War II. Among the CEE countries with a restitution agenda, only Hungary and Romania recognized the rights of the current tiller who was not a former land owner and thus was not eligible to restitution: in the interest of social equity, land from cooperative and state reserves was also distributed without payment to agricultural workers in these two countries. In all other CEE 36 4. Transformation of Cooperative Farms in Central and Eastern Europe countries, the current tillers had to pay for land, although they received “firstrefusal” rights to the land that they were cultivating at the time. Restitution affected land that had shifted after World War II to cooperative or state ownership. It did not affect land that had always remained in private ownership. The actual restitution strategies differed among countries, ranging from flexible restitution in the form of transferrable value-denominated certificates in Hungary to rigid restitution of the original physical plots in Estonia. Yet in all countries the restitution process ran into considerable delays due to technical difficulties of identifying the claims, registering the privatized plots, and issuing titles to beneficiaries. Political indecisiveness and frequent course changes in some of the countries were not conducive to smooth progress of restitution either. At the end of the decade, the restitution process has been largely completed in practice, although final ownership titles have been issued to a relatively small proportion of claimants. In some cases, much of the state-owned land have not been claimed by former owners, and governments have targets for further reduction of state land reserves through continuing privatization (Table 4.2). Even in Poland, where more than three-quarters of land remained privately owned after World War II and only about 20% in total had to be privatized, the progress with privatization has been less than satisfactory and the state still owns 15% of land. Table 4.2. Privatization of Agricultural Land in Selected CEE Countries (1997-1998 status) Lithuania Estonia Romania Czech Rep. Poland Privatized (final title) 37% 57% 71% 81% 85% State-owned 63% 43% (target 36%) 29% 19% (target 9%) 15% Despite the lack of formal titles and deficiencies in registration of ownership, all countries have procedures that allow users to lease plots from the large pool of state-owned land. Many corporations take advantage of this option by leasing land from the state. Many individuals use land that they have received through the restitution process although they still do not have a final title to this land and it is not counted as privatized in the official statistics. The available figures for privatization of agricultural land (Table 4.2) therefore understate the actual use of land by private producers. It is quite clear that, at present, state-owned land is not cultivated by the state. Most of the land still registered as state-owned is in fact cultivated by private individuals and private corporate farms (companies), 37 Agricultural Cooperatives in Transition Countries because the formerly powerful state farms have been dismantled or transformed into private organizations. Individualization of Agriculture There is a sharp distinction between ownership of land and tenure or use of land. This distinction applies everywhere in the world, but especially in the context of transition, where land privatization suffers from technical and political delays, while use of land continues. To differentiate between the processes associated with these two distinct concepts in transition economies we use two terms, “privatization of land” to describe transfer of land into private (as opposed to state or collective) ownership, regardless of its use, and “individualization of farming” to describe transition to individual (as opposed to collective) cultivation, regardless of the ownership of cultivated land. Farming companies and corporate farms, even if run as private businesses with private ownership of land and assets, are not regarded as individual farms, primarily because of their management and share-ownership structure. 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 (heirs of original owners), either through direct assignment or ultimately through auction mechanisms. Yet whether or not the physical allocation of plots leads to individualization of farming depends on what the owners decide to do with their newly recovered land. Some land owners – mainly rural residents – may take possession of their land and switch from collective to individual farming. Other individuals may lease their land to large corporate farms or enterprising farmers. Different motivations are possible for the mutually exclusive decisions to cultivate privately owned land individually or lease it out. Individual risk preferences provide one explanation: some land owners prefer the safety of the collective or corporate umbrella, with its professional management, to the unfamiliar risks of individual farming. Another explanation is that many beneficiaries left farming long ago and now have jobs and property in urban areas. Some restitution claimants may even have left the country: Hungary, for instance, recognizes the rights of heir of former owners who live abroad. All these individuals have no immediate personal use for their restituted land, and entrusting it to a larger corporation or cooperative makes good economic sense. These new land owners, of course, also have the option of leasing their land to other individuals who are actively engaged in farming and seek to increase their holdings. Leasing to private individuals, however, may look more risky than 38 4. Transformation of Cooperative Farms in Central and Eastern Europe leasing to a large organization, which is regarded as a more reliable source of lease payments. Individually cultivated land has increased dramatically in all countries of the region since the beginning of transition (Figure 4.2). In Slovenia, Poland, and Latvia practically all land is in individual tenure and there are no large collective or corporate farms. The change has been particularly striking in Latvia, where, prior to 1990, less than 5% of agricultural land was in individual tenure (Slovenia and Poland never had a large collective farm sector). In most other CEE countries, the share of individually cultivated land is around 50%-60%, up from 5%-10% before 1990 (only the two components of former Czechoslovakia lag in this respect). Overall, the available data show that 65% of agricultural land across the CEE countries is in individual tenure (as of 1997). 100 80 60 40 20 0 Svn Pol Lat Lit Est Rom 1990 Hun Bul Cz Svk ECE* Figure 4.2. Land in individual tenure 1990 and 1997. 1997 * Without Poland and Slovenia Our emphasis on the distinction between individualization and privatization is attributable to two main sets of factors. First, individual farming is the dominant organizational form in market economies. As long as production is managed collectively or cooperatively, the organization is exposed to the dangers of moral hazard, shirking, and free-riding that may severely impair its economic performance. This is the standard argument against production cooperatives and collectives, which are seldom observed in market economies. Private companies and corporations, even when not organized as cooperatives, suffer from transaction costs associated with principal agent arrangements and labor monitoring difficulties, and their spread in market agricultures is also limited due to elusiveness of scale economies in farming. As noted previously, corporate farms control not more than 20% of agricultural land in USA, and only about onetenth of these farms are true investor-owned corporations; the rest are basically family farms that incorporated for a variety of tax reasons. 39 Agricultural Cooperatives in Transition Countries Second, farms in market economies are not restricted to operator’s own land, and farmers increasingly rely on land that they lease in from others. Thus, in Belgium, France, and Germany, over 60% of land in farms is leased, and not owned by the farmer. On average across the 15 countries of the EU, farmers lease in 40% of land that they cultivate. In the USA, only one-third of farm land is fully owned by the operator, and this percentage has been declining steadily since 1950, while the percentage of leased land in farms has been increasing. Analysis of the EU data shows that individual farms using a higher percentage of leased land are on average larger: farms using more than 30% of leased land average 39 hectares across the 15 EU countries, while farms using less than 30% of leased land average only 18 hectares. In the USA, farms in which land is fully owned by the operator average about 100 hectares, while farms in which owned land is augmented by leased land are more than three times as large (340 hectares on average). Surveys conducted by the World Bank and Phare/ACE in some CEE countries also show that individual farms with leased land are significantly larger than farms using own land only. Thus, in Hungary individual farms that lease land average 20 hectare compared with 3 hectares for farms without leased land, in Bulgaria 5 hectares compared with 1 hectare, and in Romania 4 hectares compared with 3 hectares. The frequency of land leasing among individual farms in CEE countries, however, is still very low, much lower than the frequency of leasing among farms in EU and USA. Leasing, and not land ownership, appears to be the important mechanism for increasing farm sizes in market economies. Farms need not be constrained by the limited availability of own land: farm sizes can adjust through land leasing as long as farmers are guaranteed secure tenure and market institutions are available for reasonably smooth transfer of land use rights. Thus, there is no reason to be concerned about excessive fragmentation of land produced by various land reform strategies. Initial fragmentation that may arise through certain allocation and distribution procedures will be quickly corrected by market mechanisms if land markets are indeed allowed to function. Restructuring of Farms Prior to 1990, production cooperatives and state farms cultivated around 90% of agricultural land in the CEE countries (except Poland and Slovenia). After a decade of transition, the share of large farms that succeeded the traditional socialized farm is down to 40% of agricultural land (Figure 4.3). The decline in the share of land controlled by large farms has been accompanied by significant reorganization and restructuring of the sector. In addition to the significant increase in the amount of individually cultivated land, the process has led to 40 4. Transformation of Cooperative Farms in Central and Eastern Europe virtual elimination of state farms, drastic reduction in the importance of cooperatives, and creation of a new category of private corporate farms (companies). The farms in all organizational categories are now substantially smaller than the former cooperatives and state farms. The individual farms, on the other hand, are larger (see Table 4.3 below). 100% 80% Individual Corporate Cooperative State 60% 40% 20% Figure 4.3. Distribution of farm land by organizational form before and after 1990. 0% Pre-1990 Post-1990 As the share of traditional production cooperatives and state farms declined through restitution and restructuring, new corporate farm structures began to emerge in the CEE countries. Unfortunately, no comprehensive data are available on the operation and management of these new entities, but case studies suggest that in Hungary, the Czech Republic, and Estonia many of the large farms have transformed into market-driven corporations. In Romania, at least some of the large farms are new associations or cooperatives created voluntarily by individual landowners after the completion of land privatization. The large corporate or cooperative farms in CEE are now often forced to operate under hard budget constraints, with a real threat of bankruptcy proceedings in case of default. Figure 4.4 is a schematic diagram of farm restructuring in CEE, illustrating the processes that have led to the growth of the individual sector and the reorganization of the socialized farm sector. The changes in farm structure are driven primarily by three processes: restitution of land ownership, privatization of state property, and reorganization of cooperatives into new private companies. Restitution is the main channel for the growth of the individual sector, as it shifts land resources from former cooperatives and state farms to new individual owners. Land not claimed by individuals remains in state ownership. Privatization of non-land assets of state farms through open auction and sale mechanisms (i.e., through channels other than restitution to former owners) leads to creation of new corporations or companies, which may be classified as state-controlled (with minority private interests) or private (with majority private shareholders). Finally, cooperatives may reorganize creating new private corporations or new, 41 Agricultural Cooperatives in Transition Countries sometimes smaller cooperatives. In some countries (Estonia, Lithuania, Hungary), the various corporate forms (“legal bodies”) cannot own land: they lease their land resources from physical persons. Initial structure State farms Privatization of state property Reorganization New structure Statecontrolled corporations Adjustment by leasing Leasing to legal entities Private corporations Cooperatives Cooperatives Restitution of land ownership Individual farms Non-farming land owners Leasing from non-farmers Leasing to individuals Individual farms Leasing among farmers Figure 4.4. Schema of the process of farm restructuring in CEE. The transition from the initial inherited structure to a new structure is just the first stage in the overall process. The changes in farm structure continue as a dynamic adjustment of farm sizes through land transactions. These are mainly leasing transactions, as buying and selling of land is reported fairly seldom. Individual recipients of restituted land who are not interested in farming may lease their allotments to corporations or other individuals. On the other hand, enterprising individuals may seek to increase their holdings by leasing surplus land from cooperatives and corporations (in countries where corporate land ownership is allowed). Land markets thus sustain transfer of land resources to more active and more efficient producers, leading to gradual optimization of the farm sector through restructuring. Emerging Farm Structure Large-scale cooperatives or corporate farms continue to play an important role in agriculture in CEE outside Latvia, Poland, and Slovenia. In seven CEE 42 4. Transformation of Cooperative Farms in Central and Eastern Europe countries (Hungary, Bulgaria, Romania, Czech Republic, Slovakia, Estonia, and Lithuania) about 40% of agricultural land is in large-scale non-individual farms. However, the diversity of large farm structures today is much greater than prior to 1990, when the Soviet-style cooperative and state farm were the only two organizational forms in socialist agriculture. While traditional cooperatives and state farms persist (in greatly reduced numbers), new corporate farming structures are registering as joint-stock societies, limited-liability partnerships, and private companies. The new 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. Changes are also observed in the average farm size in CEE countries. We have noted previously that the socialized agriculture was characterized by substantially larger farms than the market economies. Although large farms continue to dominate the agriculture in most transition economies, a definite downsizing is observed since 1990. Large collectives, cooperatives, and state farms have been losing land through restitution and privatization. Internal restructuring of large farms in an attempt to achieve better market orientation has often led to division of the original enterprise into two or three smaller units. As a result of these processes, cooperatives and state farms in CEE are now substantially smaller than in the pre-1990 period (Table 4.3). The new corporate farms created in the process of farm transformation in CEE countries are also smaller on average than the traditional cooperatives and state farms, although they are still large by the standards of market economy (Figure 4.5). Unfortunately, the available data make it impossible to determine if the downsizing of large farms is a continuing dynamic phenomenon, or if it was a one-time adjustment. Experience in market economies definitely suggests that further downsizing of large farm enterprises in CEE is desirable. While the very large socialist farms have become smaller, the average size of individual holdings, be it household plots or other family farms, has increased substantially across the region. The increase of individual farms in CEE is clearly shown in Table 4.3. There is some evidence that the individual farms in CEE are gradually differentiating into two distinct groups: very small units cultivated by part-time farmers (successors of the subsistence-oriented household plots from the pre-1990 era) and larger commercially oriented full-time individual farms, which are in fact responsible for the observed increase of the average farm size in the individual sector in CEE. As a result of the opposing processes that reduce the 43 Agricultural Cooperatives in Transition Countries size of collectives and augment the individual holdings, while creating a new intermediate layer of larger individual farms, the agriculture in transition economies may be gradually losing the sharply bimodal structure that traditionally characterized the farms in the socialist era. This in itself will be a change in the direction of greater compatibility with farm structures observed in market economies. Table 4.3. Average Farm Sizes by Organizational Form in CEE Countries (in hectares) Individual farms New corporate forms Pre-1990 Current Pre-1990 Current Current Pre-1990 Current Bulgaria 4,000 637 1,615 735 – 0.4 1.4 Czech Rep. 2,578 1,447 9,443 521 690 5.0 34.0 Slovakia 2,667 1,509 5,186 3,056 1,191 0.3 7.7 Hungary 4,179 833 7,138 7,779 204 0.3 3.0 Poland 335 222 3,140 620 333 6.6 7.0 Romania 2,374 451 5,001 3,657 – 0.5 2.7 Estonia 4,060 – 4,206 – 449 0.2 19.8 Latvia 5,980 – 6,532 340 309 0.4 23.6 Lithuania # 2,380 – 1,880 – 310 0.5 7.6 Slovenia – – 470 371 – 3.2 4.8 # Average size of collective, state, and corporate farms in Lithuania is based on unpublished OECD data. Source: Agricultural Situation and Prospects in the Central and Eastern European Countries: Summary Report, European Commission, Directorate-General for Agriculture (DG VI), Brussels, 1998. Collective/cooperative farms 6 State farms thou. ha 5 4 Pre-1990 Post-1990 3 2 Figure 4.5. Downsizing of large farms during the transition. 1 0 State Cooperative Corporate To examine the extent of the adjustment in farm structures during transition, it is useful to compare the farm size distribution in CEE with that observed in market economies. In Figure 4.6, panel (a) shows the aggregated land concentration curve for farms in the 15 countries of the European Union (EU15), constructed from Eurostat data. Land concentration is presented by a standard 44 4. Transformation of Cooperative Farms in Central and Eastern Europe “Lorenz inequality curve” in which the vertical axis gives the cumulative percentage of land used in farms and the horizontal axis gives the cumulative percentage of farms of all types, ranked by size. The straight diagonal line represents the situation of “ideal equality,” when land is uniformly distributed over all farms so that 50% of farms, say, account for 50% of land. The downwardbulging curve reflects the actual farm structure in the EU, with land use distributed nonuniformly over small and large farms. From this curve, the bottom 50% of EU farms (the smallest farms by size) account for 10% of land use, while the top 10% of EU farms (the largest farms by size) account for 40% of land use. The land concentration curves for USA and Canada are virtually identical with the EU curve in Figure 6; this pattern of land concentration therefore may be accepted as representative of market economies. Other panels in Figure 4.6 present land concentration curves of the ten CEE countries. The CEE land concentration curves are based on available official statistical data on farm size distribution, which are unfortunately weak. In constructing these curves, we always tried to estimate the number of farming units that control all agricultural land in each country. In this way, the distribution curves include household plots, semi-commercial and commercial family farms, and the larger corporate structures. The land concentration curves are based on the actual use of land, and are not directly related to land ownership. We should stress that the land concentration curves define “small” and “large” in strictly relative, and not absolute, terms; nor do they provide an indication of average farm sizes in different countries. The absolute size of farms varies across countries depending on the available land resources and the number of beneficiaries (i.e., the rural population). Land concentration curves abstract from these factors and only present the relative pattern of distribution of farm sizes. The land concentration curves in Figure 4.6 demonstrate the three main farm structure patterns observed in CEE transition economies. Four countries – Bulgaria, Hungary, Czech Republic, and Slovakia – sharply deviates from the market pattern. Here 90% of farming units (the small household plots and family farms) control less than 10% of land, and the top 10% of farming units – the largest collective and corporate farms – control about 90% of land. This pattern is a manifestation of a sharply dual farm structure, with millions or hundreds of thousands of very small farms at the bottom end of the size scale and thousands or merely hundreds of very large farms at the top end. The sharply dual farm structure was a dominant feature of the Soviet model of agriculture in the pretransition era, with an even more dramatic concentration of land than what we observe today: 98% of Soviet farms (the millions of small household plots in the individual sector) controlled less than 2% of land, while 2% of the largest farm 45 Agricultural Cooperatives in Transition Countries enterprises controlled 98% of land. The encouraging changes in farm structures discussed in previous paragraphs have measurably shifted the land concentration curves for the CEE countries, but they have been insufficient so far to produce a significant change in the sharply dual structure of traditional socialist agriculture in the four countries of the first group. (a) Concentration of Farm Land in the European Union (EU15) percent of land 100 80 60 40 20 0 0 20 40 60 80 100 percent of farms (b) Bulgaria (c) Hungary 100 percent of land percent of land 100 80 80 60 60 40 40 20 20 0 0 0 0 20 40 60 80 20 60 80 100 percent of farms Based on 1.2 million farms (e) Czech Republic (d) Slovakia 100 40 100 percent of farms percent of land 100 percent of land 80 80 60 60 40 40 20 20 0 0 0 0 20 40 60 percent of farms 80 20 40 60 80 100 percent of farms 100 Includes 500,000 household plots Figure 4.6. Concentration of farm land in 15 countries of the European Union (panel a) and in ten CEE countries (panels b-k). 46 4. Transformation of Cooperative Farms in Central and Eastern Europe (f) Poland (g) Slovenia percent of land 100 100 80 80 60 60 40 40 20 20 0 percent of land 0 0 20 40 60 80 100 0 20 40 percent of farms 60 80 100 percent of farms Based on 3.1 million farms from 1996 census Based on 141,000 units, including estimated 50,000 household plots (h) Romania (i) Estonia 100 percent of land 100 80 80 60 60 40 40 percent of land 20 20 0 0 0 0 20 40 60 80 20 100 percent of farms 60 80 100 80 100 percent of farms (j) Lithuania 100 40 Data by Kivistik and Elmet, Tartu Univ. (k) Latvia precent of land 100 80 80 60 60 40 40 20 percent of land 20 0 0 0 20 40 60 80 100 0 20 percent of farms Based on 220,000 private farms, 313,000 household plots 40 60 percent of farms Includes 156,000 household plots Figure 4.6 (continued). 47 Agricultural Cooperatives in Transition Countries Romania and Estonia and representatives of the second group of land concentration patterns. These two countries, starting with a sharply dual Soviet pattern, have developed in the process of transition farm structures that are close to the market pattern of land concentration. Slovenia and Poland are also characterized by “normal” land concentration curves, although this probably is not a result of transition-related adjustment: the farm structure in these countries has always been characterized by predominance of small and medium-size farms and has not changed much since 1990. Latvia and Lithuania, on the other hand, seem to have overshot in the process of adjustment, and their farm structures today are over-fragmented compared with market economies. Table 4.4 summarizes the differences in farm structures across CEE by presenting our land concentration measure – the percentage of agricultural land controlled by the top 10% of largest farms in each country. If we accept the market pattern in Figure 6(a) as an efficiency-optimizing equilibrium farm structure, then countries with sharply dual farm structures – Bulgaria, Hungary, Czech Republic, Slovakia – can be expected to undergo further downsizing of large farm enterprises and simultaneous consolidation of the very small farming units. Countries with over-fragmented farm structure – Latvia, Lithuania – can be expected to go through a phase of farm consolidation, as very small farms adjust their holdings to operationally more efficient sizes and a certain proportion of new large farms are re-created under suitable conditions. In countries in the “normal” group the process of adjustment will probably continue as well, although less dramatically. These countries will probably gradually move toward stronger presence of mid-sized farms through consolidation of the smallest holdings and further fragmentation of the large successors of state farms and cooperatives. Table 4.4. Concentration of Land: Percentage of Agricultural Land in Top 10% of Largest Farms Country Latvia Lithuania USA Canada EU15 Slovenia Poland Romania Estonia Czech Republic Bulgaria Hungary Slovakia Percentage of farm land 20 30 35 38 40 40 50 55 60 82 90 92 97 48 Characterization of farm structure over-fragmented “normal” sharply dual 4. Transformation of Cooperative Farms in Central and Eastern Europe Sectoral Changes During Transition We started by recalling the relatively high importance of agriculture in CEE countries in the pre-transition era. During the last decade the situation has changed, and the CEE agriculture is undergoing a process of “marginalization,” similar to that observed in the EU. Alternative sectors – especially services – are gaining prominence, and the share of agriculture in the economy is dropping, especially in GDP, less so in labor (Figure 4.7). Yet despite these trends, agriculture remains a much more important sector in CEE than in the EU. It continues to be a major source of employment in rural areas, employing over 15% of the total labor force (compared to 5%-6% in the EU). The rural population is particularly dependent on agriculture in Bulgaria, Poland, Romania, Latvia, and Lithuania: in each of these countries the share of agriculturally employed is over 20%. 25 share of agriculture in GDP/total employment, % 20 15 10 5 0 CEE: GDP CEE: labor Pre-1990 EU: GDP EU: labor Figure 4.7. “Marginalization” of agriculture in CEE during the transition. Post-1990 Transition initially produced enormous dislocations and shocks in the economy in general and in agriculture in particular. The elimination of central planning, price liberalization, introduction of hard budget constraints – these were entirely novel rules of the game and the countries needed time to adjust. Both GDP and agricultural production declined dramatically during the first years of transition, between 1989 and 1992-93. But as of 1993 we are witnessing a clear stabilization of both indices. There are, of course, variations across countries, but as a regional average the GDP index is actually growing again, and the agricultural product index (GAO) has definitely stopped declining (Figures 4.8(a, b)). 49 Agricultural Cooperatives in Transition Countries 140 120 100 • • •• •• • 80 • •• •• •• •• •• • 60 40 •• •• • •• •• • • • • • • 1993 • • •• • • • •• • • • • • • • • 1994 1995 1996 20 0 1989 1990 1991 1992 • • • • ••• • • • • • •• • • • • • • Bul Cz Est Hun Lat Lit Pol Rom Svk Svn CEE 1997 Figure 4.8(a). Gross Domestic Product index (GDP) for CEE countries (1989=100). 140 120 100 • 80 • • ••• •• • • • •• • 60 • • ••• •• •• • • • • ••• • 40 • • •• • • • • • • • • •• •• • • • • •• • •• • • • • • 1995 1996 • •• • • • 20 0 1989 1990 1991 1992 1993 1994 1997 • • • • • • • • • • Bul Cz Est Hun Lat Lit Pol Rom Svk Svn CEE Figure 4.8(b). Gross Agricultural Output index (GAO) for CEE countries (1989=100). The stabilization of agricultural production has not been accompanied by dramatic changes in product mix or in yields. Only the three Baltic states, and to a lesser extent Hungary, have significantly reduced the share of livestock in their output (Figure 4.9) and today livestock production in CEE countries is on a par with the rest of the EU (about half the total agricultural product). Wheat and milk yields in CEE hardly changed during the last decade, and they continue to be substantially lower than in the EU, where technological progress is continuously driving the yields up (Figure 4.10). The decreasing role of agriculture in the CEE economy is reflected also in the decrease of absolute levels of agricultural employment. Five of the ten CEE countries (Hungary, Latvia, Slovakia, Czech Republic, and Estonia) registered sharp declines in agricultural employment since 1992 (Figure 4.11). In Lithuania and Slovenia, the level of agricultural employment remained unchanged, and only Romania, Bulgaria, and Poland show significant increases in agricultural employment. 50 4. Transformation of Cooperative Farms in Central and Eastern Europe 80 70 60 50 Pre-1990 Post-1990 40 30 20 Figure 4.9. Share of livestock in agricultural product of CEE countries before and during the transition. 10 0 Bul 6 Hun Pol Rom Cz Svk Est Lat Lit ton/ha or ton/cow 5 4 Pre-1990 Post-1990 3 2 Figure 4.10. Wheat and milk yields in CEE countries and the EU before and after 1990. 1 0 CEE: wheat EU: wheat CEE: milk EU: milk Rom Bul Pol Lit(*) Svn(*) Hun Lat Svk Czech Est -15 -10 -5 0 5 10 Figure 4.11. Changes in agricultural labor for CEE countries, annual rates in percent (1992-1997). (*) Change not significant at p=0.05 Changes in gross agricultural output and agricultural employment lead to changes in productivity of labor in agriculture. Generally, the decrease in agricultural employment more than offset the decrease in GAO, and the productivity of labor tended to grow. Five countries (Estonia, Czech Republic, Slovakia, Hungary, and Slovenia) register pronounced increases in productivity of labor in agriculture, and these are clearly attributable to the decline in 51 Agricultural Cooperatives in Transition Countries agricultural employment (Table 4.5). In Bulgaria, Poland, and Romania, where agricultural employment actually increased, the productivity of labor has not declined because of matching growth in agricultural product. Only two countries, Latvia and Lithuania, show a decrease in the productivity of labor since 1992, mainly due to sharp decreases in GAO. Since physical yields have not changed significantly during the last decade and unfortunately reliable information is not available on the capital asset base in agriculture, changes in productivity of agricultural labor provide a good proxy to changes in the efficiency of agriculture in CEE countries. We may thus tentatively conclude that, during the last decade, the efficiency of agriculture has increased in the Czech Republic, Slovakia, Estonia, Hungary, and Slovenia (primarily due to decline in agricultural employment) and has not improved in Romania, Bulgaria, and Poland (where agricultural employment increased). Lithuania and Latvia still have not recovered from the negative shocks to production and output, and it is premature to evaluate the efficiency of their agricultural sector. Table 4.5. Changes in Productivity of Agricultural Labor and Their Relationship to Reform Policy Index* Synthetic policy index Change in productivity of country group averages agricultural values labor Czech Rep. -2.19 -10.9 9.78 7.74 7.5 Slovakia 0.54 -6.34 7.35 6.82 Estonia -7.74 -13 6.05 6.89 Hungary 0.17 -3.91 4.25 7.92 Slovenia 4.89 0 3.76 7.88 Romania 4.1 4.27 -0.15 5.55 6.3 Poland 1.44 2.24 -0.78 7.49 Bulgaria 1.49 2.37 -0.86 5.50 Lithuania -3.18 0 -3.18 6.45 Latvia -11.49 -4 -11.49 6.47 * The changes are annual rates of change for 1992-97 calculated, in percent, from semi-logarithmic growth regression. The synthetic policy index is on a scale of 1 to 10, with higher values corresponding to greater progress toward market environment. State Change in gross Change in agricultural agricultural product employment In addition to changes in GAO, changes in agricultural employment, and the resulting changes in productivity and efficiency of agriculture, Table 4.5 gives a synthetic policy index, which represents the cumulative progress of overall reforms in each country. Our synthetic policy index is the average of five policy indices available from international sources. It combines three World Bank indices (the Country Policy and Institutional Assessment (CPIA) Index, the Liberalization Index, and the Environmentally and Socially Sustainable Development ECA Index), the Euromoney Creditworthiness Index, and the 52 4. Transformation of Cooperative Farms in Central and Eastern Europe Freedom House Freedom Index. The CPIA Index is based on four groups of policy variables that are not directly related to agriculture: macroeconomic management and sustainability reforms; policies for sustainable and equitable growth; policies for reducing inequalities; and public sector management. The 20 variables collected in these four groups are assessed by a mixture of expert judgments and quantitative techniques to arrive at a measure of progress in economic policy and institutional reforms. The ECA index is specifically geared to agricultural reforms in transition economies: it includes assessments (based on expert judgments) of the achieved progress in several areas, such as price and market liberalization, privatization of agro-processing and input supply, rural financial systems, development of market-oriented institutional frameworks, and of course land reform. The three other indices, in addition to economic and financial dimensions, incorporate various measures of political freedoms and democratization that are an inevitable part of the transition to the market. For all indices, higher values correspond to greater progress toward a market environment. We see from Table 4.5 that, on a scale of 1 to 10, the countries showing an increase in the efficiency of agriculture have an average index value of 7.5, while the other countries, where the efficiency of agriculture has not improved, have a significantly lower average index value of 6.3. It thus seems that greater progress with general reforms, including macroeconomic policies, financial institutions, and democratization, is conducive to greater progress in agriculture, leading to noticeable changes in efficiency. Privatization and individualization of agriculture and changes in farm structures are necessary conditions for the recovery of agriculture. And yet they are probably not sufficient without an overall reformminded environment and general reform-oriented policies and attitudes in government and society. Where To From Here? The course of transition during the last decade has displayed at least two surprising features. First, the process has been much slower than originally anticipated. And second, the actual outcomes meet neither the optimistic expectations of market liberals nor the dire predictions of conservatives. The transition from command economy to market has been a long-drawn process because of its intrinsic complexity, which was not fully appreciated at the start. Yet it is clear that, despite difficulties and delays, all CEE countries are moving steadily toward a market-oriented environment. The policy achievements vary across the region, largely depending on political and social forces, but as we 53 Agricultural Cooperatives in Transition Countries see from Table 4.5 all countries have passed the half-way mark of 5.0 in their transition from command economy to market. The one attribute of the former system that has been totally and irrevocably abolished is central planning. This is probably the one attribute that has made the former economic and social structure possible. Now that it has been eliminated, many of the traditional accepted patterns of behavior and operation in agriculture and other sectors are unsustainable. There is no choice but to move forward with market reforms. The agricultural sector in CEE definitely has not embraced the family farm as the dominant farming structure. This is contrary to the original expectations of Western experts, who anticipated a quick and sweeping transition to individual farming as in market economies. Yet the individual sector has grown dramatically and it controls today 60% of agricultural land in CEE countries. Despite this strengthening of the smallholder sector at the expense of the large farms, agriculture did not collapse because of fragmentation and privatization, as predicted by conservative doomsayers. Farm structures in CEE today cover a spectrum of forms, which include small subsistence-oriented household plots, medium-sized commercial family farms, and large corporations. The amount of land controlled by the individual sector is unlikely to shrink in the future. Yet market forces will probably continue to produce significant internal restructuring in the individual sector, encouraging consolidation through transfer of land resources from very small units to more efficient mid-sized farms with commercial orientation and greater earning potential. The large corporate farms are also there to stay, yet market forces and efficiency considerations will probably sustain the downsizing trend that has been generally observed so far. Consolidation of mid-sized family farms and downsizing of very large corporations will ensure that the CEE farm structure continues to move toward the market distribution pattern. Finally, agriculture does not seem to act as an engine of growth in the CEE countries. The available evidence suggests a reverse causality: it is the general macroeconomic recovery stimulated by a progressive policy environment that encourages agricultural growth. Yet agriculture remains important for the rural population: empirical evidence clearly suggests that the welfare of rural families increases with the increase in their land endowment. However, the future of the rural population must be considered in a broader context of rural development, including creation of alternative jobs in rural areas that will facilitate the exit of surplus agricultural labor without involving the undesirable option of rural-tourban migration. The countries should take advantage of the adjustments required for EU accession to broaden the scope of reform and to include rural development 54 4. Transformation of Cooperative Farms in Central and Eastern Europe issues in their agenda in addition to the traditional agricultural topics of land privatization and farm restructuring. A Note on Sources of Data The most recent and up-to-date country-level information (as of 1999) was obtained by direct correspondence with national research institutes and statistical organs in the ten countries covered by this study. In addition to these direct contacts, we have used the data from a series of country studies commissioned by FAO for this workshop and by OECD for the Forum on Agricultural Policies in Non-Member Countries held in Paris in April 1999. Important data were obtained from the Directorate-General for Agriculture (DG VI), European Commission, Brussels. Specifically, we have made extensive use of the series of country and summary working documents published in 1998 under the general title of Agricultural Situation and Prospects in the Central and Eastern European Countries. Pre-1990 data for former Comecon member-countries were obtained from Statistical Yearbook of Member-States of the Council for Economic Mutual Assistance, regularly published in Russian in Moscow up to 1990. The pre-1990 data for the Baltic states were collected from Soviet statistical yearbooks. Comparative data for market economies were obtained from Eurostat yearbooks (for EU countries) and from the 1997 USDA Census of Agriculture (for USA). 55 5. Agricultural Cooperative Enterprise in the Transition from Socialist Collective Farming Zvi Lerman and Bruce Gardner (1995-2006) The collapse of the command economy of the Soviet Union and countries within its sphere of influence in 1989-91 provided the opportunity for many economic adventures. One of these was the opportunity for new roles for cooperatives. The collapse created an institutional vacuum surrounding large “farm enterprises” – the dominant organizational form in former socialist agriculture – in which basic economic functions were not being performed. While the idea of rural cooperation has had a mixed history in the world’s market economies, conditions in the former Soviet Union and other formerly collectivized farm sectors in Central and Eastern Europe appear in important respects promising for the cooperative form of business. So far, however, cooperative enterprise has not taken off as a means of economic organization. This paper considers the record and the reasons for it. Economic Environment of the Early 1990s In general, the agricultural sectors of the formerly centrally planned economies were in a state of disarray and economic crisis in the period after the socialist governments fell. The former command system disappeared almost overnight while new market structures had not yet emerged, and state support provided to the large farm enterprises was largely withdrawn. An immediate outcome of this transition shock was a sharp decline in both agricultural output and the sector’s GDP (value added) in the early 1990s. However, the countries of Central and Eastern Europe (CEE) recovered from this initial decline much faster than the 56 5. Agricultural Cooperative Enterprise in the Transition from Collective Farming former Soviet republics in the Commonwealth of Independent States (CIS). Gross agricultural product in the CEE countries stabilized after 1994, while the decline in CIS agriculture continued for four more years, until 1998 (Table 5.1, Figure 5.1). The principal reason for the difference appears to be the more resolute adherence of CEE governments to reform policies throughout their economies. Agricultural labor in CEE countries as a group declined all through the 1990s, as growing economies provided alternative employment opportunities to some in the relatively large rural population (Table 5.1, Figure 5.2). In CIS, on the other hand, the shrinking economy triggered a substantial increase in agricultural labor during that period, in a sharp contrast to the pre-1990 pattern, when Soviet labor was shifting from agriculture to other sectors of the economy. The differences in the behavior of agricultural output and labor between CEE and CIS produced sharp differences in productivity of agricultural labor: it generally increased in the CEE countries, while declining through 1998 in CIS (Table 5.1, Figure 5.3). Table 5.1. Agricultural output, agricultural labor, and agricultural labor productivity for CEE and CIS, 1990-2002 (percent of 1990) Ag output Ag labor Year CIS CEE CIS CEE 1990 100 100 100 100 1991 89 95 107 94 1992 85 82 113 90 1993 83 79 112 85 1994 73 110 84 76 1995 70 114 80 81 1996 67 116 80 81 1997 67 116 77 81 1998 117 75 65 80 1999 121 74 68 78 2000 122 71 68 75 2001 125 66 75 79 2002 124 63 75 79 Bold numbers mark the recovery period after the turnaround. Source: Lerman et al. (2004) based on official country statistics. Ag labor productivity CIS 100 84 76 76 67 63 60 60 57 59 59 64 69 CEE 100 101 94 99 98 113 113 118 121 123 124 143 147 Although total factor productivity or technical efficiency changes are more difficult to estimate because of severe data limitations, some attempts have been made and the findings are similar to those for labor productivity. Kim, Lee, and An (2005) undertook technical efficiency growth comparisons for 22 CEE and CIS countries over the 1992-2001 period. They found higher rates of increase in the CEE countries, and moreover variations in efficiency gains across countries in the CEE group were positively associated with measures of economic reform. 57 Agricultural Cooperatives in Transition Countries . 120 1990=100 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 CIS 140 Figure 5.1. Gross Agricultural Output 1990-2002 (GAO 1990 = 100). CEE 1990=100 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 CIS 160 Figure 5.2. Agricultural labor 1990-2002 (1990 = 100). CEE 1990=100 140 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 CIS CEE 58 Figure 5.3. Agricultural labor productivity 1990-2002 (1990 = 100). 5. Agricultural Cooperative Enterprise in the Transition from Collective Farming Analysts in the CEE and CIS countries as well as outside observers have undertaken efforts to understand the sources of problems in the agriculture sectors, and to recommend policies to improve economic performance. These have ranged from simple ideas such as raising commodity prices to fundamental reforms of the legal and institutional arrangements governing property and contracting. In this context it is natural to consider new roles for cooperatives among the options. Potential for Cooperatives The ideals of cooperative enterprise in agriculture have had a long history of acceptance and even enthusiastic advocacy in CEE and CIS countries. This legacy was tarnished by experience of State control of cooperatives. The International Labour Office recently summarized the situation as follows (Couture et al., 2002:2): The State-controlled period was characterized by government interference in cooperative affairs at all levels. Most of the time, member registration was compulsory, and the directors and staff were not appointed by the members, but directly appointed by the State. In many countries, cooperatives were not particularly concerned about profitability since they were subsidized by the government and received preferential treatment. In the same way, they were subject to rigid State planning, which did not provide them with the possibility to develop their own entrepreneurial strategies. Their business affairs were often restricted to a small range of products and services, and State control extended to instructions and directives concerning, for example, the number of employees and their wages. The large collective farms that had these characteristics were administered under the label of cooperatives in the formerly socialist countries, even when they had not evolved out of voluntary associations but were imposed from above in a forced collectivization process. Consequently, among many of the rural population the concept of cooperation in agricultural production appears to have lost, if it ever had, the positive and idealistic connotations it has had in the traditional cooperative movement throughout Europe and North America. In its place, we find a strong psychological resistance to cooperation, bred from years of abuse of the whole concept by socialist regimes. As noted by the Plunkett Foundation (1995), 59 Agricultural Cooperatives in Transition Countries The use of the word “co-operative” in Central and Eastern Europe will not only create the wrong impression, it will also create barriers to progress. The old style of co-operative or collective has no relevance in the new free-market approach. The predominance of “old-style” production cooperatives in socialist agriculture as of 1970 is shown in Table 5.2 (the numbers do not include state farms). Table 5.2. Share of Production Cooperatives in Socialist Agriculture (%, 1970 data) USSR Agricultural land 37.5 Number of 64.2 employed Productive assets 42.4 Gross product 40.0 State purchases: grain 51.9 meat 33.3 milk 36.5 Source: GSE 1973, vol. 13:102. Bulgaria 68.0 58.7 Czechoslovakia 55.7 60.5 Hungary 67.6 75.5 Poland Romania 1.2 0.9 53.9 82.0 East Germany 72.0 72.2 56.7 62.6 47.9 53.2 -45.8 1.4 1.1 23.6 42.3 --- 81.0 44.7 59.7 64.5 50.0 53.4 79.8 -43.3 1.3 1.3 0.6 71.0 20.6 28.7 79.3 --- The Soviet model of agriculture that emerged in the process of collectivization during the 1930s was automatically imposed by the USSR upon the CEE countries after World War II. Collectivization of agriculture in these countries was part of an extensive process of land reform, which included distribution of large estates to smallholders. Contrary to the Soviet Union, which eliminated all private land ownership immediately in October 1917, land in these countries was never completely nationalized, and production cooperatives were created on private land contributed by joining members. The original landownership records of cooperative members survived the Communist era in these countries. In all other respects, the production cooperatives in CEE were basically similar to Soviet collective farms: they were large-scale horizontally integrated multifunctional entities operating in a centrally controlled environment, which had a responsibility for both economic and social aspects of rural communities and whose members were largely treated as hired hands. The collectivized agriculture in CEE developed the same duality as Soviet agriculture, with largescale production cooperatives coexisting symbiotically with small household plots of their members. Table 5.2 illustrates the very large share of Soviet-model collective farms in the agricultural sector of most countries in the region. The difference to 100% is 60 5. Agricultural Cooperative Enterprise in the Transition from Collective Farming largely made up by state farms, not the quasi-private household plot sector. A notable exception in CEE was Poland, where collectivization had not been forced and agriculture remained largely based on individual peasant farms (a similar system prevailed in Yugoslavia). Without large-scale multifunctional collectives, Poland retained a relatively receptive environment for agricultural service and credit cooperatives. In 1970, the Polish marketing cooperatives purchased over 75% of farm products from peasant farms (GSE 1973, vol. 13:106). In general, throughout the rest of the region, various service and consumer cooperatives have not been eradicated as completely as in the USSR. In Hungary, 70% of consumer services were provided by cooperatives; in Czechoslovakia, Romania, Hungary, Poland, and East Germany, consumer cooperatives handled over 30% of all retail trade (1971 data) (GSE 1973, ibid). While the end of State support created severe economic problems for agriculture in the transition economies, the end of State supervision created opportunities. Given the institutional inheritance of large collective farming operations, with management and on-site infrastructure for large-scale enterprise remaining largely intact, the idea was that autonomous cooperatives might solve some of these problems, especially in input provision and output marketing. The main competing idea, development of individually owned and operated farm enterprises along the predominant Western model, was hindered by the lack of property ownership in land, lack of competitive market sources of inputs, and lack of access to credit. Proponents of cooperatives as a means of progress in the agricultural sectors of transition economies, at a conference of the International Cooperative Alliance in 1995, formulated the following principles of “genuine” cooperation (Couture et al., 2002:2): N democratic member control (generally ‘one-member, one vote’) N voluntary and open membership N member economic participation (on the basis of equity provided by members, with limitations on individually held equity) N distribution of surpluses or profits as patronage refunds N social consciousness (providing training and information, and community services). These principles are essentially congruent with U.S. statements of what distinguishes cooperatives from other forms of business, namely: “First, persons who own and finance the cooperative are those that use it. Second, control of the cooperative is by those who use it. Third, benefits of the cooperative are distributed to its users on the basis of their use.” (Barton, 1989:1). 61 Agricultural Cooperatives in Transition Countries Could the prospects for such cooperatives overcome the historically validated negative impressions of the past in the minds of agricultural producers or potential new farmers? If so, the new cooperatives would then have to overcome the classical economic problems that have been blamed for the failure of cooperatives in agricultural production in the West – problems of incentives of managers and workers (in allocation of on-farm effort, mobilization of members’ savings, distribution of the cooperative’s net returns, and means of treating off-farm income earned by members), of raising capital for investment , or of reaching collective decisions needed for example to adopt new technology or change the product mix to meet market trends. It seems likely that exposure to the negative side of Western debates on cooperatives would resonate with some whose experience with State-directed collective farming was disheartening, even if for different reasons. Experiences with New Cooperatives Different countries in the region have pursued different farm restructuring strategies. Albania, Romania, Armenia, and to a certain extent also Georgia rapidly disbanded the collective farms and divided their land into very small private farms during 1991-92. In other countries, dismantling is a rare phenomenon and the traditional collective and state farms are generally required to reorganize into new corporate forms with market-sounding names, such as joint-stock company, limited liability partnership, etc. “Agricultural cooperative” is one of the corporate forms explicitly recognized by company laws in transition countries for the successors of former collectives. Agricultural cooperatives are observed quite frequently, as is evident from the data for Russia, Ukraine, and Moldova in Table 5.3. Yet agricultural cooperatives in transition countries are not really cooperatives in the Western sense of the word and they are virtually indistinguishable from other corporate farms. In a recent interview with the manager of a large agricultural cooperative in Hungary, it turned out that the farm was actually owned by the manager’s extended family and it was simply registered as a cooperative for legal and administrative considerations. The term “cooperative” thus appears to be a misnomer for farms in transition countries. This may explain why comparative productivity studies consistently fail to detect any performance differences between agricultural production cooperatives and other corporate farms in CIS and CEE (see, e.g., Curtiss et al., 2004; Schulze et al., 2001). In most CIS countries land was generally privatized starting in 1991-92 through a mechanism involving distribution of “land shares” – paper certificates 62 5. Agricultural Cooperative Enterprise in the Transition from Collective Farming of entitlement. These certificates could be converted on request into specific physical plots for individual farming, but most landowners simply turned around and entrusted their land shares to the managers of the former collectives for joint cultivation. Survey results consistently indicate that the new landowners overwhelmingly preferred the security of the cooperative umbrella to the risks and uncertainties of individual initiative (Lerman et al., 2004). These preferences are particularly strongly underscored by the landowner attitudes in Moldova and Ukraine, where land shares have been recently converted by law into fully titled and demarcated physical plots, so that special request is no longer required in order to obtain land. In Moldova, only one-third of individual landowners cultivate their land independently, while fully two-thirds entrust their land through various leasing arrangements to managers of newly created corporate farms, many of them registered as “agricultural cooperatives” (2000 World Bank survey). In Ukraine (2005 FAO survey), only 20% of rural landowners cultivate their own land, while two-thirds (as in Moldova) leave their land in joint cultivation in the local large enterprise (the remaining 13% lease their land to individual farmers). Table 5.3. Number of agricultural production cooperatives in selected CIS countries in the early 2000s All corporate farms Russia (2001) Agricultural production cooperatives 15,314 24,995 Agricultural cooperatives in percent of all corporate farms 61% Ukraine (2000) 3,325 13,487 25% Moldova (2003) 166 1,527 11% Source: Official country statistics. This attitude is also prevalent in the CEE countries, which unlike CIS have followed the strategy of restitution to former owners. Thus, half the restitution beneficiaries in Bulgaria and a significant proportion in Hungary have also chosen to remain in agricultural production cooperatives, while in Romania, where collectives were forcibly dismantled, fully 48% of land originally distributed to private farms is now in various informal farmers’ associations (Lerman et al., 2004). Members of former collective farms are thus voting “with their feet” for perpetuation of the cooperative framework, at least in the immediate future, probably because of the sense of security it affords to individuals in a highly uncertain and rapidly changing environment. Two conferences, one at which Western and Eastern European proponents of cooperation assessed the record as of 2001 and the other a more scholarly 63 Agricultural Cooperatives in Transition Countries conference sponsored by the European Association of Agricultural Economists in 2005, provided several informative case studies. Bulgaria is notable in that after the legislated liquidation of Soviet-style cooperatives and distribution of land holdings to individuals, at least on paper, in 1991, the way was clear, and encouraging, for the formation of new cooperatives. Most of the landowners chose “to unite their land and other resources in agricultural production cooperatives.” (Doitchinova et al., 2004:2). By 1998 the number of such “new” cooperatives reached 3,268, which with an average of 742 hectares and 234 members accounted for 42 percent of Bulgaria’s land in cultivation. However, the expansion occurred despite growing problems in maintaining viability in a difficult economic environment, caused partly by State credit that, in retrospect, was too easily granted. After a new Law for Cooperatives in 1999, which attempted to stem the budgetary costs of aid to cooperatives, the cooperatives accelerated moves already under way to devolve their assets to members, e.g., by renting land to non-members and their own members (“A strange thing is happening – the cooperators are renting land from themselves” (Ganev, 2001:36)). Many cooperatives were liquidated – essentially a declaration of bankruptcy – and the number remaining in operation dropped from about 3,300 in 1999 to 1,750 in 2003 (Doitchinova et al., 2004). Although it is still believed by some that “the fate of Bulgarian agriculture rests with the fate of agricultural cooperatives” (Ganev, 2001:35), the trend appears firmly in the direction of individual farms and larger agricultural holdings, essentially registered profit-seeking corporations, which grew to number 4,300 in 2003, averaging 214 hectares in size and accounting for 30 percent of Bulgaria’s cultivated land (Doitchinova et al., 2004:6). Doitchinova et al. (2004) conclude with an assessment of what might be done to cure the problems of production cooperatives. The problems are seen as stemming from difficulties in resolving differences in interests of members, the distribution of income, mobilizing capital for investment, and ensuring labor participation of members, Several ideas for contractual arrangements among members are discussed, but the most promising alternative is seen as follows: “Most of the contradictions between the different groups of cooperative members can be solved by transforming the cooperative [to become] a limited liability company” (Doitchinova et al., 2004:8). This is not of course the end-state envisaged in the cooperative movement. The Czech Republic on the eve of transition in 1989 had an almost entirely collectivized agriculture, with 99 percent of both land and production attributed to large-scale collective and state farms. There were over 3,000 small, individually owned farms, but they accounted for less than 1 percent of the 64 5. Agricultural Cooperative Enterprise in the Transition from Collective Farming country’s land and production (Curtis et al., 2004:4). The cooperative movement had had a strong presence in Czech agriculture for over 150 years (Moznar, 2001). The intellectual foundation was there for cooperatives to play a major role in picking up the pieces in the transition period of the 1990s. Indeed, the mandatory breakup of former collective farms resulted as of 2000 in a roughly even split of agricultural land between cooperatives of several kinds, business companies of several kinds, and owner-operated small farms (Moznar, 2001:44). The last category was expected by some to become predominant, and had expanded to an estimated 23 percent of Czech agricultural land by 1995; but from that point various larger-scale enterprises held their own (Curtiss et al., 2004:5). Hungary had some experience with cooperatives before 1948, but the Sovietstyle collective farm, where the residual profits were extracted by the State and the members were not independent owners, “was alien to the Hungarians, who had an entirely different tradition” (Sebestyen, 1993:301). The result was that the collective farm concept was transformed in the Hungarian context. Farmland was not nationalized and remained the property of the members (even if they could not farm all the land as individuals). As of 1990 there were 1,360 cooperative farms in operation, which accounted for 80 percent of all farmland. Of their one million members, half were active and half were pensioners (Filipsz and Szabo, 2001), and within these cooperatives there were about 40,000 relatively independent farming units, about 30 of them on average per cooperative. These were, for example, machinery-services units that rented equipment from the cooperative (Sebestyen, 1993). Hungary’s history of flexibility of organization within a broadly Soviet-style collective farm system provided a useful starting point for the more drastic changes that had to be undertaken with the end of State support and direction after 1990. Laws governing compensation of former owners and reorganization of cooperatives were in place by 1992. The laws provided for the division of cooperatives’ assets among existing members (as well as former members and their heirs), permitted members to withdraw from the cooperative along with their share of assets, and specified that cooperatives may transform themselves into a limited liability or joint stock corporation. Enterprises that remained cooperatives were not entitled to special tax or credit treatment (Sebestyen, 1993). In these circumstances, the number of agricultural cooperatives in Hungary has declined substantially, to about 800 in 2000, which cultivated about a third of the country’s farmland and employed about 135,000 (compared to the 500,000 active members mentioned above for 1990). The cooperatives that disappeared often did so essentially through bankruptcy liquidation, with assets going either to former members or to corporate enterprises. As in the previously discussed 65 Agricultural Cooperatives in Transition Countries countries, the cooperative as a means of organization of agricultural production is proving unviable as compared to the alternatives. Rizov and Mathijs (2003) attempt to explain the survival and growth of farms in Hungary using characteristics of the farms as explanatory variables, but they do not consider organizational form as a causal factor. Ferto and Fogarasi (2004) undertake an explanation of organizational form in Hungarian agriculture through application of ideas of transaction-cost economics as developed in Allen and Lueck (1998). The general hypothesis is that certain organizational forms, with a focus in these studies on family farms as compared to corporate farms, are best suited to particular economic environments. The particular hypotheses that receive most attention are that high transaction costs, for example in mobilizing capital or dealing in labor or product markets, favor large corporate farming in which more decisions are handled through internal management instructions rather than priced transactions (following Coase’s classic article, 1937); and that when price-based transactions are necessary, they are done at a scale sufficient to minimize high costs per transaction. Ferto and Fogarasi (2004) do not find empirical evidence that transaction-cost factors are important in explaining the prevalence or success of family farming as compared to larger-scale corporate farming, and they do not attempt to investigate whether the decline of cooperative farming might be linked to transaction-cost factors. Their work provokes the thought, however, that transaction costs should be considered in the analysis of fate of agricultural cooperatives, especially their devolution to much smaller individual farms. These small farms unquestionably face high transaction costs in both input acquisition and product marketing, and that could be a reason for cooperative enterprise to play a role in the farming economy even if not as the internal management mechanism for large farms. The study of Romanian organizational structure by Rizov (2002) suggests similar reasons for farmers becoming individual owner-operators, part-time farmers, or “association farmers” (essentially smaller-scale cooperative ventures for purposes of pooling capital). It is noteworthy that remaining a large-scale cooperative is not even considered a possibility in the Romanian context, given the “spontaneous privatization” with which many cooperatives were broken up by members upon their first opportunity to do so in 1991 (Rizov, 2002:172). Marketing and Input-Supply Cooperatives In considering cooperatives in agricultural production we have been looking where their prospects are in general weakest. In the United States, for example, all manner of experiments have been undertaken in cooperative and communal 66 5. Agricultural Cooperative Enterprise in the Transition from Collective Farming farming over the past 150 years, and they have almost without exception been commercial failures and have not survived; yet cooperatives in the broader agricultural economy have thrived. In 1915 marketing cooperatives sold $624 million of farm products, amounting to 8 percent of U.S. farm output. In 2002 they sold $70 billion of products (including processed products), about 15 percent of the aggregate U.S. wholesale value of the products. Farm input and service cooperatives have grown to a volume of business of about $26 billion in 2002 (USDA, 2004). Farm production cooperatives are too negligible to have any statistics reported on them. Many observers have noted that conditions in the transition economies that make farming economically most difficult involve marketing and even more so input supply. Often this is attributed to monopolies on either the buying or selling side, but it may equally well be a problem of high transaction costs in an environment of generally not well developed marketing infrastructure, including information, transportation, and storage services. Could cooperative enterprises owned by farmers remedy these problems? Certainly the hopes for this remain and are being implemented. In the case of Hungary, while farming cooperatives are not passing the survivor test, a substantial number of new cooperatives have been established in marketing and input supply. Legislation of 1999 provided financial support for the formation of such cooperatives and attempted to ensure access to working capital. As of 2000 there were estimated to be 500 new local cooperatives, including specialized ones for the marketing of fruits and vegetables, pigs, poultry, sheep, and for crop warehousing (Filipsz and Szabo, 2001). Legislation in transition countries is finally beginning to differentiate between production cooperatives and service cooperatives. This is a notable departure from earlier cooperative laws in the CIS, which distinguished between “consumer cooperatives” and “producer cooperatives”, indiscriminately lumping both production and service cooperatives in the latter category. Thus, the Ukrainian Law on Agricultural Cooperation adopted in July 1997, after a general definition of a cooperative as a voluntary association of members established for the pursuit of a common agricultural activity, specifies that production cooperatives (those created for joint farming activities) must be based on members’ labor and are therefore organized as associations of individual farmers, whereas service cooperatives (those created to provide farm support services to their members) may employ hired labor and their membership may therefore include both individual and corporate farms. The cooperative laws in Russia and Moldova, on the other hand, still restrict cooperative membership to individual farmers. 67 Agricultural Cooperatives in Transition Countries No official statistics are available on service cooperatives in CEE and CIS, and we have to rely on farm-level surveys to provide some information on cooperation among farmers in transition countries. Despite the resistance to cooperatives stemming from the long-term abuse of this concept under the Soviet regime, we are witnessing the emergence of new forms of cooperation among individual farmers in transition countries (Table 5.4). This is voluntary cooperation, often informal and sporadic, that stands in stark contrast to the all-pervasive mandatory cooperation of the socialist era. Cooperation is quite strong in many areas, with the notable exception of processing and credit. Consistently with theoretical considerations, the level of cooperation is lower in Poland, where the market environment is substantially more developed than in the other countries. In another series of surveys conducted in CEE back in 1993 (Euroconsult 1995), 45% of Romanian private farmers, 30% of Bulgarian farmers, and 15% of Hungarian farmers indicated that they participated in cooperative farm-support activities. Table 5.4. Cooperation in farm services among private farmers (percent of respondents) Russia Ukraine Belarus Armenia Moldova Poland Some form of cooperation 74 82 60 44 30 20 Consulting 58 64 33 9 10 8 Marketing 33 24 13 10 11 8 Input supply 30 20 7 1 7 5 Machinery 43 45 37 19 19 7 Production services 27 34 17 10 11 6 Processing 8 6 0 1 7 2 16 10 0 2 2 Credit 37 Source: World Bank surveys 1994-2000. Cooperation in machinery – a high-cost lumpy asset – is understandably one of the major areas of cooperation among individual farmers in transition countries. Through cooperation, the actual access of individual farmers to machinery and machinery services is much higher than that suggested by machinery ownership rates. Thus, in Armenia only 14% of farmers own farm machinery (either individually or jointly with their relatives and neighbors). Machinery pools and service cooperatives, however, ensure that fully 80% of individual farmers in this country have access to machinery or mechanical field services (Lerman and Mirzakhanian, 2001). In Moldova, fewer than 30% of peasant farmers participating in the 2000 World Bank survey have their own machinery; another 40% have access to machinery through joint ownership (a kind of low-level cooperation) or rental; finally, over 30% buy mechanical field services. It is not clear how much of the machinery rentals and custom machinery 68 5. Agricultural Cooperative Enterprise in the Transition from Collective Farming services originate from cooperatives and how much from private rental companies, but we have seen in Table 5.4 that about 20% of farmers have cooperation in machinery. New forms of cooperation compensate in part for the absence of crucial markets in products and services. As markets become more developed, the ways in which farmers cooperate are likely to evolve as well. Summary Developments since the demise of socialist agriculture in the economies of Central and Eastern Europe and the former Soviet Union provide a set of experiments in economic organization whose outcome will be crucial for the future of agriculture in those countries. For the agenda of this Journal, it is notable that a large element of these experiments involves the role and functioning of cooperatives. Two distinct roles of cooperatives are prominent in both on-the-ground means of replacing the former collective farm system and in legislation that attempts to facilitate the successor system. The first role is the cooperative as a means of business organization, one which follows the principles of farmer-members owning, controlling, and capturing the fruits of a relatively large-scale farming enterprise as a self-governing entity. The second role is the cooperative as a means of obtaining market power for farmers in relation to buyers of their products and providers of goods and services to the farm enterprise. While both of these roles have been alive and well in proposals and new laws in the transition economies, experience so far parallels the longstanding outcome in Western market economies: cooperatives have been overwhelmingly failures in the first role, but have been moderately successful in the second. The second role is important in farmers’ estimation when they see themselves as being exploited by monopoly or monopsony power among businesses that sell products to them or buy from them, and it is important in fact when perceptions of exploitation are accurate. It seems highly likely that such market failures exist in the economic environment of the transition economies, where former State monopolies have been transferred to private hands, and in this respect farmerowned cooperatives can be useful in fostering competition, or in some cases hastening the creation of selling and buying channels which have not yet arisen in the transition. Cooperatives as a means of organizing multi-farmer agricultural production enterprises, despite some initial and continuing enthusiasm, have run afoul of the same weaknesses that underlie their general failure in the West: the seeming 69 Agricultural Cooperatives in Transition Countries impossibility of implementing the basic principles. The central issues involve management decision-making and coordination. These tasks according to cooperative principles are essentially ones of self-government by equally empowered farmer-members, i.e., they are issues of politics. These arrangements can work successfully for homeowner associations, labor unions, and clubs of many kinds, so why not for farms? The difficulties pointed to in the Central and Eastern European cases are ones of getting agreement on many managerial decisions and on mobilization of capital for investment in the cooperative, but most of all on the division of revenues or profits among members whose contributions to the business vary. The difficulties lead to a tendency toward devolution of responsibilities, assets, and revenues toward individual members (leading to a loose association of independent farmers), or alternatively to managerial decision-making by a hired executive or outside entity (converting the enterprise to a corporation or subsidiary of a non-agricultural enterprise). Even for cooperative enterprises in marketing and processing, or in supply of farm inputs and services, it is not clear how far the cooperative principles of management will prove viable. The Western story is moving toward cooperatives becoming managerially more and more like corporations, with ownership and management by persons other than the farmer-members. Indeed it is arguable that cooperatives still flourish more because of favorable tax and regulatory treatment than the advantages of cooperative principles as mechanisms of economic organization for the business. Can the story be different in the transition economies? The evidence on the fate of agricultural cooperatives in the CIS and CEE countries remains sketchy. The most useful findings at this time involve not conclusions, but questions for further investigation. One line of research that should prove fruitful is to analyze in more detail the experiences of individual farms. In a recent detailed study of Russian farm enterprises, we found a tremendous variation in the efficiency of production from farm to farm, not just by small margins but with large groups of farms getting 3 to 4 times the output from given resources as other farms (Grazhdaninova and Lerman, 2005). This occurs not only between farms of different organizational forms, but even within the set of former collective farms within a given region. It is likely that different farms chose different ways of solving the managerial problems that arose following the demise of the collective-farm system. Among other differences, the extent to which cooperative principles were followed, and how they were implemented, are likely to vary among these farms. It could be illuminating to see the extent to which differences in the economic performance of these farms line up with differences in managerial strategies and procedures. 70 5. Agricultural Cooperative Enterprise in the Transition from Collective Farming References Allen, D. W., and Lueck, D. (1998). “The Nature of the Farm,” Journal of Law and Economics, 41:343-386. Barton, D. (1989). “What is a Cooperative?” in Cobia, D. (ed.), Cooperatives in Agriculture, Englewood Cliffs, NJ: Prentice-Hall, pp. 1-19. Coase, R. (1937). “The Nature of the Firm,” Economica, 3:386-405. Couture, M.-F., Faber, D., Levin, M., and Nippierd, A.-B. (2002). Transition to Cooperative Entrepreneurship: Case Studies from Armenia, China, Ethiopia, Ghana, Poland, Russia, Uganda, and Vietnam, Geneva: International Labour Office. Curtiss, J., Medonos, T., and Ratinger, T. (2004). “Ownership Form Effect on Large-Scale Farms’ Performance: Case of Czech Agriculture,” in From Households to Firms with Independent Legal Status, 94th EAAE Seminar, Ashford, UK, April. Doitchinova, J., Kanchev, I., and Miteva, A. (2004). “Development of Agrarian Structures in Bulgaria: From Production Cooperatives to Sole Traders and Partnerships,” in From Households to Firms with Independent Legal Status, 94th EAAE Seminar, Ashford, UK, April. Euroconsult (1995). Farm Restructuring and Land Tenure in Reforming Socialist Economies: A Comparative Analysis of Eastern and Central Europe, World Bank Discussion Paper 268, Washington, DC: World Bank. Ferto, I., and Fogarasi, J. (2004). “The Choice of Farm Organization: The Hungarian Case,” in From Households to Firms with Independent Legal Status, 94th EAAE Seminar, Ashford, UK, April. Filipsz, L., and Szabo, Z. (2001). “Hungary,” in Proceedings of Workshop Promotion of Rural Development through Agricultural Cooperatives, ICAO-ICA Europe, Budapest, June. Ganev, A. (2001). “Bulgaria,” in Proceedings of Workshop Promotion of Rural Development through Agricultural Cooperatives, ICAO-ICA Europe, Budapest, June. Grazhdaninova, M. and Lerman, Z. (2005). “Allocative and technical efficiency of corporate farms in Russia,” Comparative Economic Studies, 47(1):200-213, March. GSE (1973). Bol’shaya Sovetskaya Entsiklopediya (Great Soviet Encyclopedia), 3rd edition, Moscow [in Russian]. 71 Agricultural Cooperatives in Transition Countries Kim, H., Lee, S., and An, D. (2005). “The Dynamics of Productivity Changes in Agricultural Sector of Transition Countries,” presented at American Agricultural Economics Association meetings, Providence, Rhode Island, July. Lerman, Z. and Mirzakhanian, A. (2001). Private Agriculture in Armenia, Lanham, MD: Lexington Books. Lerman, Z., Csaki, C., and Feder, G. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries, Lanham, MD: Lexington Books. Moznar, M. (2001). “Czech Republic,” in Proceedings of Workshop Promotion of Rural Development through Agricultural Cooperatives, ICAO-ICA Europe, Budapest, June. Plunkett Foundation (1995). Review of 1994 Activities, Plunkett Foundation, Oxford. Rizov, M. (2002). “Endogenous Production Organization During Market Liberalization: Farm Level Evidence form Romania,” Economic Systems, 27:171-187. Rizov, M. and Mathijs, E. (2003). “Farm Survival and Growth in Transition Economies: Theory and Evidence from Hungary,” Post-Communist Economies, 15:227-242. Schulze, E., Tillack, P., and Frohberg, K. (2001). “Factors determining profitability of large scale farms in the Volgograd region,” Quarterly Journal of International Agriculture, 40(1):67-96. Sebestyen, K. (1993). “Transformation of Cooperatives in Hungarian Agriculture,” in Csaki, C. and Kislev, Y. (eds.) Agricultural Cooperatives in Transition, Boulder, CO: Westview Press, pp. 301-309. USDA (2004). Farmer Marketing, Supply and Service Cooperatives Historical Statistics, Cooperative Information Report 1, Section 26, Washington, DC: U.S. Department of Agriculture, August. 72 6. Agricultural Cooperatives in Eurasia Zvi Lerman and David Sedik (2014) Across Eurasia there is an immense divide in the development of agricultural cooperatives between the countries of the European Union and those of the Commonwealth of Independent States and Georgia (CIS-G). This gap can be seen in the differences in the spread of cooperatives within agriculture, in government policy and in the enabling legislative environment. The divide is supported by a basic conceptual and experiential distinction that existed during the socialist period and which continues to exist in modified form between the two parts of Eurasia today. This paper will analyze the divergence in the development of agricultural cooperatives in Eurasia. It begins with the question of why cooperatives are needed, of what problems they solve. It then describes the divide within Eurasia on agricultural cooperatives, starting with concepts, and illustrating differences in the spread of cooperatives across the region, government policies and enabling legislation. A conclusion summarizes policy recommendations to bring the useful experience of the international cooperative movement to bear on agricultural cooperatives in the countries of the Commonwealth of Independent States and Georgia. Why Agricultural Cooperatives? Cooperatives in agriculture are usually created by grassroots farms to overcome market failures, which are manifested in unwillingness of private business entrepreneurs to provide services in areas that they judge unprofitable or, alternatively, in situations where private businesses unfairly exploit farmers through monopolistic practices. Best-practice world experience suggests that service cooperatives provide a very effective way of improving the access of small farmers to market services in both situations (Schrader, 1989). The focus on 73 Agricultural Cooperatives in Transition Countries service cooperatives is fundamental; in market economies agricultural cooperatives are invariably of this type with very few exceptions (see Box 6.1). Box 6.1. Agricultural production and service cooperatives Agricultural cooperatives can be classified into two types. In production cooperatives members jointly engage in the production process. In agriculture members jointly cultivate pooled or cooperatively held agricultural resources, such as land or farm machinery. Collective farms in the former Soviet Union and kibbutzim in Israel are examples of agricultural production cooperatives. Production cooperatives sell their output to outsiders; yet their main function is to improve the wellbeing of their members by creating conditions for more efficient farming than what would otherwise be feasible in individual farms. It is often argued that by allowing members to pool their fragmented smallholdings into large farms production cooperatives exploit economies of scale and achieve higher efficiency. Yet empirical studies in market economies show that economies of scale do not generally exist in primary agriculture and many researchers have in fact shown that agricultural production cooperatives are substantially less efficient than individual and family farms. As a result, production cooperatives in the world are a tiny minority among producers. According to International Cooperative Alliance (ICA) data, production cooperatives account for less than 5% of all cooperatives in the world. Service cooperatives, on the other hand, are the largest and most typical category of cooperatives in developed and developing countries: these are cooperatives that provide services to their membersproducers, who continue to carry out all production activities independently on their own land. Service cooperatives in many countries account for a large share of transactions, particularly in agriculture. For instance, agricultural marketing, processing, and supply cooperatives are major players in markets for farm products and farm inputs in North America, Western Europe, Japan, and South-East Asia. In the U.S., agricultural cooperatives handle about 30% of farmers’ total farm marketing volume and 28% of farmers’ total supply purchases. In the European Union, the share of agricultural cooperatives is even larger: in countries such as the Netherlands, Denmark, Ireland, and Sweden 70%-80% of farm products are marketed through cooperatives and cooperatives account for 50%-70% of all farm input purchases. Service cooperatives are usually subdivided into marketing cooperatives, processing cooperatives, input supply cooperatives, and farm machinery cooperatives. Small farms commonly use agricultural service cooperatives to overcome difficulties of unequal bargaining power with large-scale input suppliers (for machinery, fertilizer, advisory and credit services), processors and middlemen. These difficulties combine to create what is sometimes referred to as “the curse of smallness”, a trap that prevents smallholders from fully exploiting their inherent productivity advantages due to barriers in access to markets (Abele and Frohberg, 2003). In dealing with a service cooperative, the market effectively deals with a relatively large entity that combines many smallholders into a single negotiating position. Access difficulties imposed by smallness are thus automatically lifted. In the post-socialist countries of Eurasia agrarian reform produced tens of millions of small family farms in place of tens of thousands of large-scale collectives and production cooperatives. Table 6.1 illustrates how small the 74 6. Agricultural Cooperatives in Eurasia average farm is in the CIS-G. The situation is no different in Central and Eastern Europe: of the total of nearly 8 million farms in the ten New EU Member States, 4.5 million (58%) are holdings of less than 2 hectares and only 80,000 (just 1%) have 50 hectares and more (Csaki and Jambor 2009). In some countries land reforms produced fragmented land holdings, based on the need for equitable distribution of different land qualities and perennial crops. Table 6.1. Average size of family farms in some CIS countries and Georgia Average farm size, hectares Armenia Georgia Azerbaijan Kyrgyzstan Tajikistan Turkmenistan Ukraine Moldova Source: Farm-level surveys 2000-2012. 1.38 0.96 1.86 3.80 3-5 4-5 4.6 --- Mean number of parcels (excluding household plot, survey data) 1.3 1.4 1.2 1.3 1.7 3 Thus, agricultural service cooperatives should be an excellent means for farms in the formerly socialist countries of Eastern and Central Europe, as well as the CIS-G, to improve their bargaining power vis-à-vis input providers and processors, thus improving the welfare of the cooperative membership. Though forming and sustaining an agricultural service cooperative is never easy, it is a proven method to improve the sustainability of small farms in agriculture today, just as it has been in Western Europe and North America for many decades. The Great Divide Within Eurasia on Agricultural Cooperatives The International Cooperative Alliance (ICA) describes a cooperative as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise”. The modern cooperative was developed in Western Europe, and spread to other industrializing countries in the late nineteenth century. Cooperatives were a self-help means to combat market failures and poverty. As bottom-up, self-help institutions, they adhered to certain principles that have been codified by ICA (2014), namely, voluntary and open membership, democratic member control (one member, one vote), member economic participation, autonomy and independence, education, training and information, cooperation among cooperatives and concern for community. 75 Agricultural Cooperatives in Transition Countries Agricultural cooperatives evolved and continue to evolve out of this liberal, democratic, self-help tradition. The countries of Eastern Europe and the Russian Empire participated in this liberal self-help tradition in the nineteenth and early twentieth centuries. However, a paradigm shift dates to the 1920s, when Lenin proclaimed his socialist vision of the development of cooperatives: gradual and voluntary movement from lower to higher forms of cooperation, from marketing, service, and credit cooperatives to production cooperatives. This vision, presenting production cooperatives as the highest form of cooperation, was subsequently implemented in Stalin’s collectivization drive (from 1928-1929), which eventually transformed agriculture in all republics of the Soviet Union and much of Eastern Europe to agriculture of collective farms, i.e., production cooperatives. 1 Thus, contrary to the situation in developed market economies, tens of thousands of production cooperatives existed in the USSR and continued to exist in the CIS-G in the form of collective farms (kolkhozes) well into the post-1992 transition and many continue to exist as production cooperatives after the reforms that eliminated collective farms. 2 The socialist legacy of agricultural production cooperatives created a parting of the ways within Eurasia that persists to this day in two forms. First, farmers’ support for the cooperative idea is low in the CIS-G countries based on past experience with the Soviet cooperative model, and due to the lack of information on and experience with alternatives. 3 Second, there is a profound conceptual 1 In The Immediate Tasks of the Soviet Government (1918) Lenin advocated for the total cooperation of the people through their involvement, first, in consumers’ and other simple types of cooperatives, and later, in producers’ cooperatives, which entail a higher form of cooperation. In On cooperation (1923) Lenin stated that cooperation must be promoted by convincing the peasants of the expediency of merging small farms and the advantages of collective production. He believed that the party and the working class should play a leading role in raising the cultural level and consciousness of the peasants. Lenin called this a “cultural revolution”. 2 Just as with collective farms, the degree to which these production cooperatives adhere to ICA cooperative principles is subject to doubt. 3 Academic researchers have investigated the issue of distrust in cooperation in post-socialist economies more formally. Gijselinckx and Bussels (2012) investigated two potential reasons for the lack of cooperation in the ex-socialist countries of Europe, finding high correlations between indicators of “social capital” and member intensity of agricultural cooperatives (percentage of farmers of a country that are cooperative members), but no discernible correlations between indicators of “general deeprooted cultural values” and member intensity. “Social capital” is defined as “the trinity of ‘networks, norms of reciprocity and trust’” (Gijselinckx and Bussels, 2012). Indicators of “general deep-rooted cultural values” were based on research by Hofstede, Hofstede and Minkov (2010). Lissowska (2013) came to similar conclusions in her analysis of social attitudes towards cooperation in European countries (based on the European Social Survey), where she found that the preference for cooperation in transition countries (Central and Eastern Europe, Russia and Ukraine) is close to that of the other (Western) European countries. However, transition countries differ in that people have less faith in the cooperative model based on their past experience with the socialist version of cooperation, which usurped and 76 6. Agricultural Cooperatives in Eurasia confusion as to the nature of agricultural cooperatives within a market economy. In the CIS-G countries the term “cooperative” is automatically understood to mean “production cooperative”, while in established market economies, where practically no production cooperatives exist, “agricultural cooperatives” are automatically understood as “agricultural service cooperatives”. Table 6.2. Development of agricultural service cooperatives in selected countries Country Year Number of Number of Number of Ratio: Ratio: agricultural cooperative farms Farms per Farms per service members member cooperative cooperatives Ukraine 2010 801 21,521 5,300,000 246 6,617 Kazakhstan 2010 300 N.A. 1,850,000* N.A. 6,167 US 2010 2,310 2,200,000 2,200,000 1 952 France 2010 2,900 500,000 516,100 1 178 Hungary 2007 58 20,177 626,300 31 10,798 Italy 2008 5,800 900,000 1,679,400 2 290 Netherlands 2010 60 100,000+ 70,000 1 1,167 Spain 2010 3,989 1,160,300 967,290 1 242 Sources: US: USDA, 2012, USDA-NAS, 2013; Ukraine: Korinets, 2013: 36, 38, State Statistics Service of Ukraine, 2011: 10, State Statistics Service of Ukraine, 2012: 51; France: Eurostat, 2013, Filippi, 2012: 14; Hungary: Szabo, 2012: 23; Italy: Bono, 2012: 19; Kazakhstan: number of service cooperatives from Conception (2012), number of farms see next note. Netherlands: Bijman, van der Sangen, Poppe and Doorneweert (2012): 16; Spain: Giagnocavo and Vargas-Vasserot (2012) and Eurostat (2013). *The sum of peasant farms (170,000) plus an estimate of the number of household plots (1,680,000, assuming that each rural household has a household plot). Data for peasant farms from Statistical Agency of Kazakhstan (2012); data for rural households from Statistical Agency of Kazakhstan (2012), v. 1: 4. Similar numbers emerge from the 2006-2007 Agricultural Census (Statistical Agency of Kazakhstan (2007-08)). The socialist legacy has also created a sizeable disparity in the development of agricultural service cooperatives in the CIS-G compared to countries in particularly Western Europe, but also Eastern Europe. Table 6.2 illustrates that the countries of the CIS-G are many decades behind EU countries in the development of service cooperatives. Only one farm in 246 in Ukraine and one in 31 in Hungary are members of a service cooperative, while in the US, France, Netherlands and Spain each farmer is a member of a service cooperative and in Italy every other farmer is a member. There are also far more farms per cooperative in Kazakhstan, Ukraine and Hungary, than in the countries of Western Europe and the US. Whereas there is only one cooperative for every 6,000 farms in Ukraine and Kazakhstan, and for every 10,000 farms in Hungary, in France there exists one service cooperative for every 178 farms. This statistic distorted the liberal democratic model of cooperation that pervaded Europe (including Russia and Ukraine) before socialism. 77 Agricultural Cooperatives in Transition Countries also indicates that the development of service cooperatives in Eastern Europe and the CIS-G is far behind that in the US and Western Europe. Policy and Legislative Support for Cooperatives Policies and legislation comprise the enabling environment for the development of cooperatives. The purpose of this section is to point to the key areas where the tools of public policy can assist in the development of agricultural service cooperatives, and then illustrate the differences in approach between CISG policies and international best practice. We should preface our remarks with the following general observations. First, it is not fruitful to directly compare all policies for agricultural cooperatives in the EU countries with those in the CIS-G countries. Cooperative law and policies have considerably evolved in the EU countries over their more than 100-year history, as a result of changes that have gone on in the cooperative movement. Today, there are many cooperatively owned and operated companies that are equally as large and complex as multinational public corporations. As the size and complexity of companies change, so do laws governing them. It is counterproductive to transplant regulations from EU member states with a more developed cooperative sector with a legal body that serves this sector to countries where the cooperative movement is in its infancy and in which the main subject is startup cooperatives (van der Sangen, 2012). Second, it is difficult to point to types of policies that support or inhibit cooperative development based on a pancountry comparison of present policies and indicators or cooperative market presence primarily because the “success indicator” of cooperatives (market share) depends not only on current policies but on past policies and development as well. In a cross-country comparison Brusselaers, Doorneweert and Poppe (2012) found no correlation between current market share of agricultural cooperatives and policies. Agricultural Service Cooperatives in CIS-G Countries It is therefore preferable to look to the reality of cooperatives in the CIS-G countries and take only what is relevant from international, cooperative bestpractice enabling policies and legislation. A picture of the development of the cooperative movement in countries of the CIS-G is presented in Chapters 7-11, and also in Millns (2013), Korinets (2013), Tomich (2013), FAO (2014), and Akimbekova (2010). The following picture emerges from these studies: The socialist legacy of agricultural production cooperatives has caused low farmers’ support for the cooperative idea. There is also a profound conceptual 78 6. Agricultural Cooperatives in Eurasia confusion as to the nature of agricultural cooperatives within a market economy. The term cooperative is automatically understood to mean “production cooperative” both by farmers and by politicians. Politicians, while expressing support for the cooperative idea, often promote cooperation as a means to consolidate land holdings of smallholders into larger production cooperatives. This, of course, increases the unattractiveness of the cooperative idea to farmers. There are very few working agricultural service cooperatives throughout the CIS-G. Statistics on cooperatives are often difficult to interpret because of the large number of “sleeping cooperatives” and the conceptual confusion between service and production cooperatives (see Box 6.2). The popularity of “sleeping cooperatives” is a direct result of poor policies whereby governments have occasionally advanced subsidies, machinery leases or credits at preferential rates to agricultural cooperatives (Korinets, 2013). Practically all CIS-G countries have cooperative-specific laws in their statutes (see Chapter 7). The prominent role of production cooperatives in CIS-G countries (as successors of Soviet-era collective farms) is reflected in the prevailing service/production dichotomy, which is often “canonized” in separate laws for the two types of cooperatives. Six of the twelve CIS-G countries have separate laws for production and service cooperatives on their statutes. This is not the recommended practice in market-oriented economies. The ILO guidelines for cooperative legislation recommend “one law for all types of cooperatives, possibly with specific parts/chapters for specific types of cooperatives” (Henry, 2012: 59), and CIS-G countries indeed seem to be moving in this direction in their recent legislative attempts (Kyrgyzstan, Tajikistan, Azerbaijan, and perhaps most notably Ukraine). According to the ILO guidelines, the one-law approach, among other benefits, diminishes bureaucracy and prevents fragmentation of the cooperative system that inevitably weakens its selfmonitoring and lobbying power (see Chapter 7). Tax policies in CIS-G countries are often profoundly unfriendly to service cooperatives, often entailing double taxation for farmers who may venture to join them. This is not because of any built-in bias against cooperatives: it is simply because tax laws generally treat cooperatives as any other legal person (corporation), without due regard to cooperatives’ specific features. 79 Agricultural Cooperatives in Transition Countries Box 6.2. Agricultural cooperatives in Kyrgyzstan Statistics on cooperatives in Kyrgyzstan are available from two sources: a special unit dealing with cooperative development in the Ministry of Agriculture and the National Statistics Committee (NSC). The Ministry reports the number of registered cooperatives, which showed impressive growth over time, rising from about 300 in 2004 to 1,300 in 2009 (Figure 6.1). 4 NSC based its reporting on the number of active (operating) cooperatives. The gap between the two sources is dramatic (Figure 6.1). In 2011, the Ministry reported more than 1,400 registered cooperatives, while according to NSC there were just 400 active cooperatives in the country (National Statistics Committee of Kyrgyzstan, 2012). It thus became apparent that more than 70% of registered cooperatives in Kyrgyzstan were inactive and existed only on paper, presumably with the intent of taking advantage of future credit or taxation benefits that might materialize through government policies. Such entities are known as “sleeping cooperatives”. The dominant majority of registered cooperatives in Ministry of Agriculture statistics are production cooperatives, not service cooperatives. In 2009, 88% of the registered cooperatives were classified as production cooperatives and only 12% were service and processing cooperatives. Figure 6.1. Development of agricultural cooperatives in Kyrgyzstan 2004-2011. Key: Grey bars: registered cooperatives from Ministry of Agriculture; black bar: active cooperatives from National Statistics Committee of Kyrgyzstan. FAO initiated a survey of cooperatives in 2012. The sample frame for the survey consisted of the 400 active cooperatives in the NSC database. The original objective was to survey a sample of 100 cooperatives from the NSC list, collecting information mainly on service cooperatives, with control information on some production cooperatives. This objective could not be achieved, however, because virtually no pure service cooperatives were found in the NSC database. Among 400 active cooperatives in the NSC list, only 17 were identified as mixed service/production cooperatives and 3 as trade/service cooperatives. Source: Adapted from Chapter 7. Cooperative law may outline conceptual principles of the taxation of cooperatives and suggest taxation guidelines, but ultimately any tax ruling is based on the Tax Code. Thus, Kyrgyzstan Law of Cooperatives (2005) contains 4 These numbers do not include credit unions, created mainly by the Raiffeisen Foundation in Kyrgyzstan (some 300 in 2009). 80 6. Agricultural Cooperatives in Eurasia a blanket statement deferring all tax-related decisions for cooperatives to the Tax Code (Article 32). Taxation of cooperatives involves two distinct issues: (a) value added tax (VAT) and (b) tax on profits at the level of the cooperative. In both instances, the Western approach to cooperative taxation is guided by the view that cooperatives act on behalf of their members as their agents. Because of the close involvement of the members in the decision-making processes in the cooperative and because of the special nature of the transaction between the members and their cooperative, cooperatives can be seen as the executing agents of the members. This view suggests that transactions between cooperatives and their members should be exempt from both VAT and profit tax. The burden of taxation should shift from the cooperative (“the agent”) to the members as the principal (see also Chapter 11). Not all legislation in the CIS-G countries adheres to these principles. Even Ukraine, which has generally good legislation on agricultural service cooperatives, has not completely adapted its tax system to provide a good tax environment for private plot holders who wish to form a service cooperative (see Chapter 10). Registration requirements for cooperatives are often unnecessarily difficult. Cooperatives are legal bodies and as such require registration, either as part of general registration of legal bodies according to Civil Code or as a special registration procedure specified in the country’s law of cooperatives. The ILO guidelines for cooperative legislation state that, “the establishment of a speedy and impartial registration procedure is a first step by the state towards facilitating the development of a genuine cooperative system” (Henry, 2012: 69). The registration requirements in CIS-G legislation are usually formulated in a muted general language. The mild tone adopted in various CIS-G laws is consistent with the ILO recommendations on registration of cooperatives (Henry, 2012): …a cooperative must be registered once the conditions laid down in the law are fulfilled.…If prior approval is necessary, the discretionary power of the approving authority must be strictly and effectively limited by law. In no case must the registration procedure hinder people from forming entities in the way that suits them best. Registration . . . [should] be concluded within a short time period; a refusal to register must be justified in writing; in the case of refusal, the founders may appeal before a court, which should give a decision 81 Agricultural Cooperatives in Transition Countries within a brief time period. The fees for the registration and publication must in no case be prohibitive (pp. 68-70). A different approach is found in the new Law of Agricultural Cooperatives (2013) in Georgia. Uniquely among the CIS countries, Georgia establishes a special state agency, the Agency for the Development of Agricultural Cooperatives within the system of the Ministry of Agriculture. The main purpose of this agency is to develop viable cooperation in agriculture in Georgia. In pursuit of this overall goal, the agency is charged with the following competencies (article 8): N Administration of government support measures, and provision of a strategy for the development of cooperatives in Georgia. N Provision of training, advice and information to cooperatives on issues of importance to them. N Monitoring and evaluation of cooperatives in Georgia. N Organization of conferences, consultations and seminars on cooperative issues, and cooperation with the International Cooperative Alliance. N Granting and termination of the status of an agricultural cooperative. Agricultural cooperatives in Georgia first register in the registry of entrepreneurs and non-profit (non-commercial) legal entities. In order to be granted the additional status of “agricultural cooperative” cooperatives must register with the agency (art. 7.2). The cooperative is then evaluated according to criteria specified by law, and must provide periodic information to the agency for monitoring purposes. In return, the cooperative is eligible for government support measures. According to the Law on Agricultural Cooperatives (art. 15.2), the rules for granting and termination of the status of an agricultural cooperative were to be specified within 2 months after the Law came into force in July 2013. However, to date (March 2014) no regulation on this crucial issue has been made public. The two-step registration process without clear criteria for the granting and termination of the status of an agricultural cooperative would appear to be inconsistent with the strong recommendations for simplicity and transparency voiced by the ILO (see above). In the absence of clear regulations on the rules for granting and termination of the status of agricultural cooperative, it is not possible to clearly understand the mandate of the Agency for the Development of Agricultural Cooperatives in Georgia. However, sources within Georgia state that the two registrations are of a totally different nature. Registration as a legal entity is the normal record-keeping listing required in Georgia as well as in other countries for legal bodies, including for all cooperatives. Registration with the 82 6. Agricultural Cooperatives in Eurasia agency is an optional step to be undertaken if the cooperative would like to participate in government support programs. The authority to grant and terminate the status of “agricultural cooperative” in Georgia represents an effort at quality control, in order to weed out “false cooperatives” which abuse the cooperative name in order to qualify for state aid. 5 This is an important function, as the “sleeping cooperative” phenomenon mentioned above is fairly widespread in the region. News reports in the Georgian press indicate that the government expects the new cooperative law “to stimulate the enlargement of farms”(Georgia Business, 2013). Georgia’s new law of agricultural cooperatives does not speak explicitly of agglomeration of holdings in production cooperatives or transfer of individually owned land to cooperatives. The views in the media are apparently fostered by the definition of agricultural cooperative in article 6 of the new law, where areas of cooperative activity are listed as “production, processing, packaging, labeling, storage, transportation and marketing of agricultural products”. Lack of clear differentiation between the activities of production and service cooperatives is probably responsible for the traditional identification of any cooperative with “production cooperative” (see Chapter 7). Conclusions Because of the legacy of the past, CIS-G countries require specialized legislation (on cooperatives, as well as mention in the civil and tax codes) in order to provide an enabling environment to allow agricultural cooperatives to operate properly. Ukraine is a good model: it has benefitted from at least three advisory projects from donors in order to improve its cooperative legislation in the past two years, and it now has perhaps the best legislation on agricultural service cooperatives in the CIS-G. For the revision of legislation, it may be helpful to set up fora where government, donors and service cooperative leaders can exchange views on enabling legislation with the aim of supporting the development of service cooperatives. Good legislation is important, but it is not sufficient. Politicians in the region also need to do their part. Production cooperatives should not be advanced as a policy tool to solve land fragmentation. Production cooperatives are known to be inefficient, in the post-socialist context they are vestiges of the past, and their political and financial support is indefensible 22 years after the dissolution of the Soviet economic system. On the other hand, agricultural service cooperatives 5 Information provided by the FAO Representation Office in Tbilisi, Georgia (March 2014). 83 Agricultural Cooperatives in Transition Countries have the potential to solve real problems of small and medium size farms that produce the majority of agricultural output in every CIS-G country. The rural population also requires capacity building. Farmers need to be informed on the cooperative idea and its benefits. In Ukraine this issue was mentioned as perhaps the most important issue by the participants of the All Ukraine Public Meeting “Ukraine on the Eve of the International Year of Cooperatives” (15 December 2011) attended by service cooperative leaders, regional cooperative activists, as well as researchers, government employees and project personnel connected with development of cooperatives (Korinets, 2013:17). Cooperative Development Centers in the United States are an example of the type of government-private sector collaboration that can accomplish this task. Cooperative Development Centers are non-profit state-level organizations funded by cooperatives themselves and co-funded by the US Department of Agriculture. Their function is to explain the cooperative idea and the specific benefits for those interested, to train in cooperative management skills, and support the public with the business, legal and tax information needed for cooperative startups and management. They also offer individual technical assistance by qualified experts, the costs of which may be covered by the US Department of Agriculture grants for the development of cooperatives. While the type of public-private partnership represented by the US Cooperative Development Centers is an excellent example of an institution to support the development of cooperatives, there is no substitute for a grass-roots cooperative movement driven by enthusiasm for the cooperative model. It is the movement in countries around the world that was responsible for building agricultural service cooperatives far before they became a part of state policy. The cooperative movement in all CIS-G countries is at an early stage, perhaps understandable for countries that only twenty years ago knew only the Soviet model of cooperation. Agricultural service cooperatives also require capacity building and investment support as part of a targeted policy to improve the sustainability of small family farming. Unfortunately, governments in the region do not yet have the capacity to do this. At this time only donors in association with governments and cooperatives in the region can accomplish this with any degree of expertise. But the typical donor project of 2 years is not sufficient to develop a farm service cooperative to self-sufficiency. The best example of donor support in the region is Danone-Ukraine’s support of milk cooperatives through Dobrobut gromad (Heifer International) in Ukraine where Danone has supported cooperatives for an average of 5 years (Danone-Ukraine, 2014). The Danone-Dobrobut gromadmilk cooperatives cooperation is not, however, a typical donor intervention. If the 84 6. Agricultural Cooperatives in Eurasia raw product offered by supported cooperatives meets Danone’s quality standards6 the company enters into a long-term contract with the suppliers to secure its raw material base. Thus, this is a two-way beneficial arrangement, not standard dependence on donor generosity. Other private dairy firms interested in creating a high-quality raw material base may wish to consider such an approach. References Abele, S. and Frohberg, K., eds. 2003. Subsistence Agriculture in Central and Eastern Europe: How to Break the Vicious Circle, Studies on the Agricultural and Food Sector in Central and Eastern Europe, Vol. 22, IAMO, Halle. Akimbekova, G. U. 2010. “Agricultural Cooperation in Kazakhstan: problems and possible solutions,” Ekonomika APK (Kiev), No. 9: 161-166. Bijman, J., G. van der Sangen, K.J. Poppe and B. Doorneweert (2012). “Support for Farmers’ Cooperatives; Country Report The Netherlands”. Wageningen: Wageningen UR. Georgia Business (2013). Business Gruziya, 9 August 2013. http://bizzone.info/agriculture/2013/1376075873.php. Bono, P. (2012). “Support for Farmers’ Cooperatives; Country Report Italy”. Wageningen: Wageningen UR. Brusselaers, J., Doorneweert, B. and K. Poppe. 2012. “Support for Farmers’ Cooperatives: EU synthesis and comparative analysis report: policy measures”. Wagingen: Wagingen UR. Cobia, D., ed. 1989. Cooperatives in Agriculture (Englewood Cliffs, NJ: Prentice Hall). Conception. 2012. Conception of the Development of Agricultural Cooperation in Kazakhstan, Kazakh Research Institute of Agricultural Economics and AO “Kazagroinnovatsiya”, Almaty. Csaki, C. and Jambor, A. 2009. “The Diversity of Effects of EU Membership on Agriculture in New Member States,” FAO Regional Office for Europe and Central Asia Policy Studies on Rural Transition, No. 2008-1 (Budapest). http://www.fao.org/fileadmin/user_upload/Europe/documents/Publications/P olicy_Stdies/EUeffects_en.pdf Danone-Ukraine. 2014. “Cooperatives and Family Farms.” http://danone.ua/en/social-responsibility/id/kooperativi-ta-simejni-fermi-004/ 6 If a supported cooperative does not meet Danone’s standards, investment support is eventually dropped. 85 Agricultural Cooperatives in Transition Countries Eurostat. 2013. “Agricultural holdings, 2000-2010.” http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Agr icultural_holdings,_2000-2010.png&filetimestamp=20121105110459 Filippi, M. 2012. “Support for Farmers’ Cooperatives; Country Report France”. Wageningen: Wageningen UR. Food and Agriculture Organization of the UN (FAO). 2012. Report of the Twentyeighth FAO Regional Conference for Europe, 19 and 20 April 2012. http://www.fao.org/docrep/meeting/025/md942e.pdf Food and Agriculture Organization of the UN (FAO). 2014. International Roundtable on Cooperation, Report (in Russian). http://www.fao.org/fileadmin/user_upload/Europe/documents/docs/ASI/roun dtable/Report_ru.pdf FAO Regional Office for Europe and Central Asia (FAO-REU). 2014. Regional Initiative for Europe and Central Asia. http://www.fao.org/europe/agrarian-structures-initiative/en/ Georgia Business (2013). Business Gruziya, 9 August 2013. http://bizzone.info/agriculture/2013/1376075873.php. Giagnocavo, C., Vargas-Vasserot, C. 2012. “Support for Farmers’ Cooperatives; Country Report Spain”. Wageningen: Wageningen UR. Gijselinckx, C., Bussels, M. 2012. “Support for Farmers’ Cooperatives; EU synthesis and comparative analysis report; Social and Historical Aspects”. Wageningen: Wageningen UR. Henrÿ, Hagen. 2012. Guidelines for Cooperative Legislation, 3rd ed. revised (Geneva: International Labor Office). Hofstede, G., Hofstede, G.J. and Minkov, M. (2010). Cultures and Organizations: Software of the Mind, third edition (New York: McGraw-Hill). Hoyt, A. 1989. “Cooperatives in other Countries,” in Cobia, D. (1989), pp. 81-97. ICA. 2014. “Co-operative identity, values & principles,” International Cooperative Alliance. http://ica.coop/en/what-co-op/co-operative-identityvalues-principles Korinets, R. 2013. “Sel’skokhoziastvenny obsluzhivaiushchie kooperativy v Ukraine” [Agricultural Service Cooperatives in Ukraine], FAO Regional Office for Europe and Central Asia Policy Studies on Rural Transition No. 2013-6. http://www.fao.org/docrep/018/ar593r/ar593r.pdf Kyrgyzstan in Numbers. 2012. Kyrgyzstan v Tsifrakh 2007-2001 [Russian], Statistical yearbook, National Statistics Committee of Kyrgyzstan, Bishkek. 86 6. Agricultural Cooperatives in Eurasia Kyrgyzstan Law of Cooperatives. 2005. Law of the Republic of Kyrgyzstan on Cooperatives No. 70 (11 June 2004) as amended by Law No. 37 (25 February 2005). http://www.cac-civillaw.org/gesetz/kirgisistan/GenossenschaftsG.KIR.ru.rtf. Lissowska, M. 2013. “The Deficit of Cooperative Attitudes and Trust in PostTransition Economies,” EAEPE Papers in Evolutionary Political Economy, no. 10 (2013). Millns, J. 2013. “Agriculture and Rural Cooperation: Examples from Armenia, Georgia and Moldova,” FAO Regional Office for Europe and Central Asia Policy Studies on Rural Transition, No. 2013-2. http://www.fao.org/docrep/018/ar424e/ar424e.pdf State Statistics Service of Ukraine. 2012. Agriculture of Ukraine, 2011: Statistical Yearbook (Kiev). State Statistics Service of Ukraine. 2011. Main Agricultural Characteristics of Rural Households in Rural Areas (Kiev). Statistical Agency of Kazakhstan. 2007-08. Results of the First National Agricultural Census, 2006-2007, vols. 1-9 (Astana) [www.stat.gov.kz]. Statistical Agency of Kazakhstan. 2011. 2009 Population Census of Kazakhstan: Households (Astana) [www.stat.gov.kz]. Statistical Agency of Kazakhstan. 2012. Agriculture in Kazakhstan 2007-2011, Statistical yearbook, (Astana) [www.stat.gov.kz]. Schrader, L. 1989. “Economic Justification” in D. Cobia, ed., Cooperatives in Agriculture (Englewood Cliffs, NJ: Prentice Hall), pp. 121-136. Szabó, G. G. 2012. “Support for Farmers’ Cooperatives; Country Report Hungary”. Wageningen: Wageningen UR. Tomich, I. F. 2013. “Initsiativa ‘Rodnoe selo’—posledniaia nadezhda selian”, Gazeta.ua, 22.03.2013 [http://gazeta.ua/ru/articles/488810] . USDA. 2012. Cooperative Statistics 2011, U.S. Department of Agriculture (Sarah Ali, Jacqueline E. Penn and E. Eldon Eversull), Service Report 72, October. USDA-NAS. 2013. Farms, Land in Farms, and Livestock Operations 2012 Summary, U.S. Department of Agriculture, National Agricultural Statistics Service, February. Van der Sangen, G. 2012. Support for Farmers Cooperatives: EU synthesis and Comparative Analysis Report—Legal Aspects. Wageningen, UR. 87 7. Cooperative Development in Central Asia Zvi Lerman (2013) The five countries of former Soviet Central Asian – Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan – have made huge strides in their efforts to reform tenure rights in agricultural land and change the traditional Soviet-style farming structure to a model closer to market principles (Lerman and Sedik, 2009). Two of the five countries – Kazakhstan and Kyrgyzstan – now recognize private ownership of agricultural land and allow land market transactions; Tajikistan retains state ownership of land but nevertheless allows land market transactions in the guise of transferable land use rights; only Uzbekistan and Turkmenistan retain the Soviet model of state-controlled rigidly nontransferable land, but even in these two countries land use and agricultural production have massively shifted from large collective farms to small leaseholders. The individualization of Central Asian agriculture has largely driven the impressive recovery in agricultural production that we are witnessing since about 1998 across the region. While much remains to be done in the area of land reform and farm restructuring until Central Asia closes the gap between the administrative-command tradition and market agriculture (EBRD, 2012, Table A.1.1.2), the focus of attention has begun to shift to post-restructuring measures intended to ensure viability and profitability of the smallholder farms by counteracting the negative effects of smallness. In developed economies, the access of small farmers to markets is usually facilitated by agricultural service cooperatives. They act as integrators of farm product sales and farm input supplies for whole groups of smallholders; they provide pooled machinery services in cases when an individual small farmer cannot purchase his own machines; they negotiate loans and credit terms with commercial banks from positions of strength (Cobia, 1989). There are hundreds of thousands of such service cooperatives in the world with hundreds of millions 88 7. Cooperative Development in Central Asia of member farmers. Central Asian agriculture, with its multitude of small family farms and underdeveloped market channels, seems to be ripe for the emergence of service cooperatives, and yet their development has been slow and halting. Instead of Western-style service cooperatives, the very concept of cooperative in Central Asia is automatically interpreted as a production cooperative, i.e., a model of the Soviet-style collective farm (Plunkett Foundation, 1995). The purpose of this paper is to introduce Central Asian policy makers to the Western paradigm of service cooperative and to explore the constraints – both physical and ideological – to faster development and acceptance of cooperatives. We also discuss the need for a complete reorientation of the government’s approach to cooperative development. The main message is that the government should focus on provision of public goods, such as information, education, and training in the cooperative arena, and desist from interfering in allocation of credits and financial support, which in the past led to inefficiency and rampant corruption. Conceptual Issues of Agricultural Cooperative Legislation in Central Asia Smallholder Agriculture and the Rationale for Service Cooperatives Individualization of agriculture manifested in a sweeping shift from largescale collective farms to small family farms is the most striking change that the transition has produced in all CIS countries. Agriculture in Central Asia is now based primarily on smallholders – peasant farms and household plots (Lerman and Sedik, 2009). These small producers control the major part of agricultural land and livestock, and they produce most of Gross Agricultural Output (GAO) across the region. Small farms everywhere in the world face essential difficulties and constraints in their access to market services, and Central Asia is not an exception in this regard. The main difficulties faced by smallholders include: difficulties with access to sales channels for market products, difficulties with access to supply channels for farm inputs, difficulties with purchase of farm machinery and transportation equipment, difficulties with access to information and advisory services, which are essential for raising productivity and efficiency, N limited access to credit resources, which are required to finance short-term working capital and long-term investment needs. N N N N 89 Agricultural Cooperatives in Transition Countries These difficulties combine to create what is sometimes referred to as “the curse of smallness”, a trap that prevents smallholders from fully exploiting their inherent productivity advantages due to barriers in access to markets (Abele and Frohberg, 2003). In developed market economies, farmers typically achieve access to markets through private intermediaries. Such private intermediaries are beginning to emerge in Central Asia in a variety of forms, which include integrators for collection and sale of farm products, private processors buying wholesale from farmers, providers of rental machinery services, or distributors of farm inputs to remote villages. These private service providers fulfill a crucial function for rural development: they free the farmers from the need to travel to the marketplace and enable them to concentrate on agricultural production. So far, however, private rural intermediaries are relatively rare in Central Asia and do not satisfy the needs of the huge number of peasant farms and household plots in the region. In such cases in market economies farmers organize self-help bodies – so-called service cooperatives, whose function is to correct market failure by allowing alternative access to markets without relying on private service intermediaries. Best-practice world experience suggests that farmers’ service cooperatives provide the most effective way of improving the access of small farmers to market services in areas where no private intermediaries operate or where private intermediaries unfairly exploit farmers through monopolistic practices (Cobia, 1989). Such cooperatives can cover the whole field-to-market value chain, including joint purchase of farm inputs, attention to water distribution and irrigation (through Water User Associations), organization of machinery pools for field work, establishment of sorting and packing facilities, transport of farm products to markets, processing, etc. They can also provide agricultural extension and market information services, as well as veterinary and artificial insemination services, all of which are essential for productivity improvement in both crop and livestock production. Typical functions of an agricultural service cooperative can be described as follows: N the cooperative purchases farm inputs in bulk for all its members and is thus able to negotiate lower prices and better terms through volume discounts; N the cooperative delivers and sells products from all its members jointly, thus breaking through minimum-quantity barriers imposed by some large buyers and chains (in addition to freeing the farmers from the need to travel in person to the marketplace); 90 7. Cooperative Development in Central Asia N the cooperative establishes processing facilities to create value added for its members, while guaranteeing fair prices and terms for raw materials delivered by its members; N the cooperative maintains a pool of farm machinery and transport vehicles to serve all its members, thus freeing small farmers from the need to purchase expensive equipment on their own; N the cooperative negotiates with the banks relatively large amounts of credits for the entire contingent of its member-farmers, thus achieving better terms and lower interest rates than each small farm would have achieved for itself. In dealing with a service cooperative, the market effectively deals with a relatively large entity that combines many smallholders into a single negotiating position. Access difficulties imposed by smallness are thus automatically lifted. Service cooperatives overcome the “curse of smallness” by conducting market transactions for a large number of small farmers simultaneously. Service cooperatives do not rule out private initiative: private trade intermediaries, integrators, and service providers may co-exist with service cooperatives and continue their currently developing operations. In parallel with encouraging the development of service cooperatives for the benefit of small farmers, government policies should also encourage and facilitate the operation of rural private intermediaries – by simplifying licensing arrangements, implementing more flexible inspection procedures, cultivating a generally friendly and helpful attitude among the local officials, and perhaps granting tax credits on transactions with agricultural producers. The government should also consider establishing special credit facilities for expansion of business activities of such rural intermediaries. Service cooperatives as an example of self-organization in the rural sector are created “bottom-up” and farmers obviously need guidance on how to create such institutions. Providing such guidance is the function of special information and training systems that the government or donors should establish for the development of cooperatives. Furthermore, new cooperatives may require support through grants or subsidized credit, but the self-organizing nature of the system of cooperatives ensures relatively easy rollout to remote rural locations. An important component for successful development of service cooperatives (as well as private support services) is a change in government attitude: instead of persisting in the negative attitude of total neglect and disdain of household plots and small family farms, government officials and decision makers have to acknowledge their importance, abandon the traditional preference for large farms, 91 Agricultural Cooperatives in Transition Countries and focus on policies that ensure a supportive market environment for successful operation of the small-farm sector – including policies to encourage creation of service cooperatives. This change of attitude will require a comprehensive “reeducation” effort in all ministries and should probably be guided from the level of the central government. Western Classification of Cooperatives International Cooperative Alliance (ICA) defines a cooperative as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically-controlled enterprise (ICA, 2013). The persons who voluntarily unite to form a cooperative are usually referred to as members or member-owners, and one of the key attributes of membership is active participation in the activity of the cooperative (whether economic, business, or social). A cooperative is a legal entity and in a certain sense it is an analogue of a shareholder corporation. There are, however, some fundamental differences between a cooperative and a corporation, as listed in Table 7.1. Table 7.1. Comparative attributes of a cooperative and a shareholder corporation Attribute Owners Owners’ objective Organization’s objective Voting rights Income distribution rules Cooperative Members Use of services provided by the cooperative Maximize members’ benefits from working with the cooperative One member–one vote, regardless of share contribution Income distributed to members in proportion to their participation in the activity of the cooperative Corporation Shareholders–investors Earning income Maximize corporate profits Number of votes proportional to number of shares (i.e., share contribution) Income distributed to shareholders in proportion to the number of shares held Perhaps the main difference concerns the organization’s objective: while business corporations aim to maximize their profit, cooperatives aim to maximize the benefits that members derive from their participation in cooperative activities, including lower prices paid for inputs and services and higher prices received for products (Cobia, 1998). The Western cooperative paradigm distinguishes between production cooperatives, service cooperatives, and consumer cooperatives based on their functional characteristics. 92 7. Cooperative Development in Central Asia Production cooperatives are cooperatives in which members are jointly engaged in the production process – irrespective of whether this is production of manufactured goods, agricultural commodities, or services. These may include: N Manufacturing cooperatives, usually called employee owned or labor managed firms. They used to be very popular in former Yugoslavia before 1989, but they are also observed in Western countries (Mondragon Cooperative Corporation in Spain, Ha’Argaz Metal Works in Israel, and others). N Agricultural production cooperatives, in which members jointly cultivate cooperatively held agricultural resources, such as land or farm machinery, producing a variety of farm products. Collective farms in the former Soviet Union and kibbutzim in Israel are examples of agricultural production cooperatives. N Cooperatives that produce services for sale to the general public (Avis Rent-A-Car world-wide, United Airlines in the U.S., Egged Transportation Cooperative in Israel, and others). These are usually characterized as employee owned or labor managed firms (like manufacturing cooperatives): they are not called “service cooperatives”, because this term is reserved for cooperatives that sell services to members, not third parties (the sales clientele criterion). Production cooperatives sell their output to outsiders; yet the main function of production cooperatives is to improve the wellbeing of their members by providing jobs and working conditions that are superior to what would otherwise be available in the market. The rationale for the creation of production cooperatives is notionally the same as for service cooperatives. In agriculture, for instance, it is often argued that by allowing members to pool their fragmented smallholdings into large farms production cooperatives exploit economies of scale and achieve higher efficiency. Yet empirical studies in market economies show that economies of scale do not generally exist in primary agriculture and many researchers have in fact shown that agricultural production cooperatives are substantially less efficient than individual and family farms. As a result, production cooperatives in the world are a tiny minority among organizations that produce manufactured goods, agricultural products, or services. According to ICA data, production cooperatives account for less than 5% of all cooperatives in the world Service cooperatives, on the other hand, are the largest and most typical category of cooperatives: these are cooperatives that provide services to their 93 Agricultural Cooperatives in Transition Countries 7 members-producers, who continue to carry out all production activities independently on their own. In contrast to the minor role of production cooperatives in market economies, service cooperatives in many countries account for a large share of transactions in the relevant economic sector. For instance, agricultural marketing, processing, and supply cooperatives (see below) are major players in markets for farm products and farm inputs in North America, Western Europe, Japan, and South-East Asia. In the U.S., agricultural cooperatives handle about 30% of farmers’ total farm marketing volume and 28% of farmers’ total supply purchases (Mather et al., 2004). In the European Union, the share of agricultural cooperatives is even larger: in countries such as the Netherlands, Denmark, Ireland, and Sweden 70%-80% of farm products are marketed through cooperatives and cooperatives account for 50%-70% of all farm input purchases (Van Bekkum and Van Dijk, 1997). Service cooperatives may actually employ some of their members as workers, but most employees (and even most managers) are hired outsiders. Service cooperatives use members’ share contributions to capital and borrowed funds to finance purchase of goods and services from various market sources and then resell these services to members at advantageous prices. Service cooperatives exist in many different areas of economic activity. Agricultural service cooperatives are usually subdivided into: N Marketing cooperatives: cooperatives that collect and prepare members’ produce for sale, truck it to the market, and arrange for actual sale at prices that are higher than what would be normally attained by the farmers themselves; N Processing cooperatives: cooperatives that buy members’ produce for processing at fair prices (often vertically integrated as the last downstream link in marketing cooperatives); N Input supply cooperatives: cooperatives that exploit the benefits of size to purchase inputs (fertilizers, chemicals, fuel, seeds, animal feed, etc.) or specialized services (veterinary medicine, artificial insemination) at prices and terms beneficial to members-producers; N Machinery cooperatives (or machinery pools): pools (fleets) of farm machinery jointly owned by groups of members in situations when it is too 7 For this reason, service cooperatives are sometimes called in English “producer’s cooperatives” (as distinct from “production cooperatives”), or “farmer’s cooperatives” in agriculture. In Russian this term would be translated as dhhi_jZlb\u ijhba\h^bl_e_c (kooperativy proizvoditelei), to distinguish it from ijhba\h^kl\_ggu_ dhhi_jZlb\u (proizvodstvennye kooperativy), which is the accepted Russian term for “production cooperatives”. 94 7. Cooperative Development in Central Asia expensive or too inefficient for each farmer to purchase machinery independently; N Agricultural extension and information management cooperatives: services to upgrade the human capital of cooperative membership through training, education, knowledge exchange, and management information technologies provided by hired experts. There are many examples of service cooperatives outside agriculture: N N N N N N N N N N rural electric power cooperatives, renewable energy cooperatives, rural telephone cooperatives, healthcare cooperatives (the cooperative hires healthcare professionals for the benefit of its members), housing cooperatives cooperative schools, nurseries, child-care facilities, cooperative art galleries (a “marketing cooperative” for art “produced” by member artists) credit unions and cooperative banks cooperative (mutual) insurance companies auditing and accounting cooperatives (usually serving other cooperatives, not individuals) All these are examples of situations where private entrepreneurs find it unprofitable to enter and provide the basic service, or alternatively the private entrepreneurs enjoy a monopolistic position that leads to exploitation of the consumers. In agriculture and other areas, service cooperatives thus fulfill the important function of correcting for market failure, by stepping in to provide missing services and counteracting monopolistic exploitation by private initiative. Consumer cooperatives in Western nomenclature are trading firms that sell consumer goods primarily to their members at advantageous prices. They are basically a variety of supply cooperatives (outside agriculture), but they are treated as a separate class because of their numerical importance in the world. The largest segment of consumer cooperatives is cooperative food stores and supermarkets (“grocery stores”), but cooperative stores that sell clothes, housewares, appliances, and even cars to their members – at advantageous prices – also fall in the category of consumer cooperatives. In the West, consumer cooperatives, unlike other service cooperatives, are most likely to deal with nonmembers (“third parties”) on a regular basis: this is their strategy of achieving 95 Agricultural Cooperatives in Transition Countries growth comparable with other firms in the highly competitive consumer services sector. Figure 7.1. Schema of a service or consumer cooperative. Figure 7.2. Schema of a production cooperative. Figures 7.1 and 7.2 schematically illustrate the organizational differences between service (or consumer) cooperative and production cooperative. The service cooperative is created by members-producers who retain their legal and operational independence, operating outside the cooperative (Figure 7.1). Twoway relations exist between the members and the cooperative: members may deliver their output to the cooperative for selling to outside customers, and members may acquire from the cooperative inputs and services that the cooperative purchases from outside suppliers. Money flows from the cooperative to members as payment for their deliveries and from members to the cooperative as payment for their purchases. Member participation in the activity of the cooperative (either selling or buying) is typically a precondition of membership, although there is no obligation for the members to sell all their output or purchase all their inputs exclusively through the cooperative. In a production cooperative, members typically work inside the cooperative, and not as independent entities (Figure 7.2). They engage in joint production using pooled resources (land or machinery); the cooperative sells the jointly produced output in the market and purchases inputs for the joint production process – not for individual members. Classification of Cooperatives in Legislation in Central Asia The legislative base in all five Central Asian countries includes a variety of laws on cooperatives (Table 7.2), starting with cooperation laws inherited directly from the Soviet system (1991-1992) and ending with latest efforts to adapt the 96 7. Cooperative Development in Central Asia cooperative legislation to Western principles (the 2005 Kyrgyzstan Law of Cooperatives and the 2013 Tajikistan Law of Cooperatives). Nevertheless, there is deep-rooted lack of understanding of the exact nature of cooperative in Central Asia and throughout the CIS. Ever since the Soviet time, legislation on cooperation and cooperatives included the standard ICA principles of voluntary membership and democratic control (see above). Although in practice these principles were blatantly abused by the state, there is by now general familiarity with the standard formula of voluntary membership and the goal of maximizing members’ benefits from participation in the cooperative. However, there is lack of clarity as to what types of cooperatives exist, how they correspond to the Western typology of cooperatives, and how the newly promoted service cooperatives are different from the Soviet-style production cooperatives (collective farms). Cooperative legislation in Central Asia (which necessarily draws on the corresponding definitions from the Civil Code and has its roots in the 1988 USSR Law on Cooperation) distinguishes between production cooperatives (proizvodstvennye kooperativy) and consumer cooperatives (potrebitel’skie kooperativy). Unfortunately, the meaning that the existing legislation imparts to these two familiar-sounding terms is different from the accepted meaning in Western usage. Furthermore, the term “service cooperative” (servisnyi kooperativ, obsluzhivayushchii kooperativ) is generally not mentioned in Central Asian legislation: it occurs only once in two versions of the Kyrgyzstan Law of Cooperatives – 1999 and 2005, and the standard range of service functions is apparently entrusted to “consumer cooperatives”. 8 8 The issue of proper classification becomes even more difficult when we notice that in addition to “laws of cooperatives” the Central Asian countries also have so-called “laws of cooperation” or “laws of consumer cooperation”, which were passed in 1991-1992 based on Soviet concepts of cooperation. These “laws of consumer cooperation” deal with so-called “rural consumer societies” – part of a centrally imposed state-run system (formerly known as Tsentrosoyuz in the Soviet Union) whose function was to supply consumer goods to the rural population and sell the output produced on household plots. The administrators of the “consumer cooperation system” remain a powerful lobby to this day and the system, although hardly functioning, is so entrenched in former Soviet countries that Tajikistan, for instance, had to retain the 1992 Law of Consumer Cooperation in its statutes in parallel with the new 2013 Law of Cooperatives. 97 Agricultural Cooperatives in Transition Countries Table 7.2. Cooperative legislation in Central Asia 1991-2013 Kazakhstan 1991 Kyrgyzstan Law of Cooperation 1992 1994 1995 Civil Code: Production Coop (articles 96-101) Law of Production Cooperatives Civil Code (amnd): Consumer Coop (article 108) 1999 Law of Rural Consumer Cooperation 2000 Law of Agricultural Partnerships and Their Associations Law of Consumer Cooperatives (excluding rural consumer cooperation) 2005 2013 Uzbekistan Law of Cooperation (revised 1993-98) Law of Peasant Associations Law of Agricultural [Production] Coops (Shirkats) Law of Cooperation 2002 2003 Turkmenistan Law of Consumer Cooperation Law of Consumer Cooperation 1998 2001 Tajikistan Civil Code: Production Coops (articles 118-123); Consumer Coops (article 128) Law of Production Cooperatives Law of Rural Consumer Cooperatives of Water Users (“Water User Association”) Law of Cooperatives `` Law of Cooperatives The so-called “consumer” cooperatives appear to be functionally closest to the Western notion of service cooperative. Their functions, according to the 2001 Kazakhstan Law of Consumer Cooperatives, include marketing, input supply, processing, and other service activities. The Kyrgyzstan Law of Cooperatives (in its 1999 and 2005 version) contains a rare mention of the term “service cooperative” with an explicit list of its functions: marketing, storage, and packing of farm products, veterinary services, fertilizer application, plant protection, construction, transport, extension services, and more. On the other hand, the 2013 98 7. Cooperative Development in Central Asia Tajikistan Law of Cooperatives does not elaborate the specific functions of either consumer or service cooperatives, simply stating in very general terms that cooperatives may engage in all legal activities involving production and provision of various services (including consumer services). This non-specific attitude toward consumer cooperatives in Tajikistan legislation may be regarded as a carryover from the 1999 Tajikistan Civil Code, which devotes a long article to consumer cooperatives but only says that their function is “to satisfy the material needs of members”. “Production” cooperatives receive very vague definition in Central Asian legislation. They are typically characterized as engaging in “joint production and other activities”. The 2005 Kyrgyzstan Law of Cooperatives includes a very terse and simple definition of a production cooperative as engaging in joint production, without mentioning anything about services. The 2013 Tajikistan Law of Cooperatives does not devote special place to production cooperatives (despite their prominence in the Civil Code), merely stating that cooperatives may engage in production alongside a range of other activities. The 1999 Tajikistan Civil Code elaborates the “other activities” by listing processing, marketing, contract work, trade, and consumer services, so that a production cooperative emerges as a mix of the Western notions of production cooperative and service cooperative. Continuing the established Soviet tradition, production cooperatives in Central Asia and all of CIS use the pooled land and assets of the members for joint production (like a collective farm) and provide marketing and supply services to the joint production process, not to its members: the production cooperatives sell the jointly produced output to third parties (a marketing service) and provide supply services (e.g., purchase of farm inputs, provision of farm machinery) to the joint production process, not to individual members. In this respect, production cooperatives in Central Asia are similar to production cooperatives in the West (to the extent that such exist), but in addition to supporting joint production, production cooperatives in CIS also supply services to members that are intended for the members’ subsistence-oriented household plots and are a byproduct of the cooperative’s collective production activity. This appears to be a unique feature of production cooperatives in the CIS, as Western production cooperatives carefully disassociate their primary business activities (joint production) from the individual farming activities of their members. The two levels of service provision in production cooperatives in Central Asia – services for joint production and services to members’ household plots – strengthen the impression these are essentially a mix of production and service cooperative. It seems that the legal distinction between production and consumer cooperatives in Central Asian legislation is not based on functional attributes (i.e., 99 Agricultural Cooperatives in Transition Countries what the cooperatives do). Instead, cooperatives are classified based on formal business-related attributes (Table 7.3), such as profit-making behavior (“commercial”, i.e., “for profit” organizations and “non-commercial”, i.e., “not for profit” organizations), clientele orientation (sales to members or nonmembers), and composition of the labor force (members work or do not work in the cooperative). Unfortunately, these formal attributes are ambiguous and fuzzy for cooperatives, and thus do not allow cooperatives to be classified into two disjoint groups. Table 7.3. Classification of cooperatives in Central Asian legislation Production cooperative Legal body Commercial (“for profit”) organization Sales to third parties only Members part of the labor force Consumer cooperative Legal body Non-commercial (“not-for-profit”) organization Sales mostly to members Members not necessarily part of the labor force First, the notion of profit in a cooperative is vague and unclear. Some international authorities argue that all cooperatives are essentially not-for-profit, because their goal is to maximize the members’ benefits by lowering the prices that they charge and raising the prices that they pay. Profits are reduced to zero (or almost zero) by this pricing policy. 9 Furthermore, there is no reason to assume a difference in profit orientation between the two groups of production and consumer cooperatives: under the current Law on Consumer Cooperation in Tajikistan (1991) consumer cooperatives include retail and wholesale traders, providers of food and other services, traders in consumer goods, etc., which in principle are not less profit-making than other cooperatives. The attributes of “forprofit” (commercial) and “not-for-profit” (non-commercial) are too ambiguous to be used as classification attributes for cooperatives and should be removed from future legislation. Second, there are also difficulties with the sales clientele attribute (“production cooperatives” selling mainly to third parties versus “consumer cooperatives” selling mainly to members). Production cooperatives in the sense of cooperatives in which members produce goods or services indeed sell their output to outsiders, i.e., third parties. But this is the Western definition of production cooperative, whereas in Tajikistan legislation (Civil Code, Article 118) production cooperatives also engage in processing and sale of agricultural products, contract work (e.g., plowing or harvesting), trade, provision of services, and other 9 The Civil Code of Switzerland (OR Art. 828) specifically defines all cooperatives as not-for-profit. This was noted by H.-H. Muenkner in materials prepared for the discussion of the draft Law of Cooperatives in Tajikistan (September-November 2011) 100 7. Cooperative Development in Central Asia activities that do not involve production – activities that mainly target members – not third parties – as the sales clientele. In Western nomenclature these cooperatives are called service cooperatives, not production cooperatives (Table 7.4), and they are definitely member-oriented in their sales, whereas the Civil Code of Tajikistan puts them in the category of production cooperatives that are supposed to sell to third parties only. Finally, consumer cooperatives in the sense of food and other retail traders (as defined in the West) indeed sell to members, but the proportion of non-member sales in these cooperatives is steadily growing and according to Tajikistan legislation eventually they will have to be transformed into production cooperatives – although they do not engage in any production. These terminological inconsistencies suggest that the feature of selling to third parties vs. selling to members should also be dropped as a classification attribute for cooperatives. Table 7.4. Functions of “production cooperative” as defined in the 1999 Civil Code of Tajikistan (Art. 118) and their classification according to Western views of production, service, and consumer cooperatives Functions of “production cooperative” according to Civil Code of Tajikistan Production Processing Sale of products Contract jobs, custom work Trade For and with producers For and with consumers Consumer goods and services Other services Services to producers Services to consumers, general population Western classification of respective functions Production cooperative Service cooperative Service cooperative Service cooperative Depends on specifics Service cooperative Consumer cooperative Consumer cooperative Depends on specifics Service cooperative Consumer cooperative Need for Consistent Definitions The terms “production cooperative” and “consumer cooperative” as used in Central Asian legislation are inconsistent with the accepted Western terminology. A consistent set of definitions of service, consumer, and production cooperatives should be introduced into legislation, based on functional features (including appropriate amendments in the Civil Code). Clear unambiguous definition of different types of cooperatives – production, service, and consumer – is essential to ensure acceptance of the concept of cooperatives by the rural population. In market economies, the term “cooperative” is automatically interpreted as a service cooperative. In Central Asia, as in all CIS countries, the term “cooperative” is still automatically understood as a production 101 Agricultural Cooperatives in Transition Countries cooperative – the model of a former kolkhoz or collective farm. Having been exposed for decades to the negative experience with such “production cooperatives”, rural people may persist in their negative view of the whole concept of cooperatives and reject any proposals to form cooperatives, even when the intention is to create service cooperatives, not old-style production cooperatives (Plunkett Foundation, 1995). The new legislative framework must acknowledge this psychological barrier to cooperatives by introducing unambiguous definitions that will prevent any possibility of misunderstanding or misinterpreting the strategic intentions. A special public awareness campaign should be organized to explain what cooperatives are in market economies, how they function, and what benefits farmers derive from membership. The educational effort should make it abundantly clear that service cooperatives are intended to improve smallholders’ access to services, thus overcoming many of the difficulties associated with small farm sizes while allowing each member to maintain their independence as a producer. Service cooperatives are not intended to overcome the problem of land fragmentation by merging small farms into larger production units: this is the role of production cooperatives, which are very rare in market economies, largely due to their lower efficiency compared with individual and family farms. The public awareness campaign should be carried out by a special cooperative information service to be established by the government with donor support. This should be a permanent system that will continue providing information to farmers and cooperatives over the long term, and not only during the creation and setup phase. The system can be modeled on existing cooperative information services in the U.S., the Netherland, and other developed countries. Taxation of Cooperatives Service cooperatives have the potential to increase the benefits to members by exercising their market power and negotiating better prices and improved terms both for sale of member products and for delivery of services. Yet tax distortions may negate these positive effects and make membership in a cooperative an ineffective proposition for farmers. Tax issues must be carefully addressed and resolved if cooperatives are to have any chance of developing in Central Asia. Farmers join cooperatives with the objective of getting higher prices for their products and paying lower prices for the inputs and services they buy. The cooperative model achieves these objectives in two ways. First, a cooperative represents many farmers in the market and thus enjoys greater market power than each small farmer individually. The cooperative can negotiate lower prices for wholesale bulk purchases of inputs and pressure traders into paying higher prices 102 7. Cooperative Development in Central Asia for guaranteed deliveries of high-quality products. Second, the cooperative does not aim to maximize its profits: in fact it distributes all its profits to members in proportion to their participation in cooperative activities, thus increasing members’ revenues and reducing their costs compared to what they could achieve by dealing with private profit-maximizing intermediaries. These two mechanisms usually guarantee that cooperative members fare better than smallholder farmers selling and buying independently. In principle this provides an incentive for joining a cooperative, but there is a danger that taxation of cooperatives may negate the membership benefits and discourage farmers from becoming members. A cooperative is a legal body and three types of taxes may negatively affect the benefits that members receive from their cooperative: N VAT on transactions between the cooperative and its members N Retail sales tax on transactions between the cooperative and its members N Tax on accounting profits reported by the cooperative The social tax is often mentioned as a serious problem for rural people, but this tax is paid by everybody – farmers and cooperatives alike – and is not activitybased. It is therefore not relevant for the present discussion. The Law of Cooperatives and, more importantly, the Tax Code, should address the three types of taxes in the following way. Exemption from Value Added Tax Peasant farmers pay VAT on their purchases from suppliers. The cooperative also pays VAT to suppliers, but then the cooperative has to charge VAT on its sales to members. As a result, members may end up paying to the cooperative more than what they would have paid independently to a supplier. To avoid negative effects of VAT on the relations between cooperatives and their members, all transactions with members – supply, provision of services, contract work – should be exempt from VAT. In addition to a provision in the national cooperative law, an appropriate amendment has to be added to the national tax codes. This is the only way to ensure that the provision is respected in practice by tax inspectors. The recommended approach to VAT exemption of cooperative transactions with members is an excellent example of the principle of “fiscal transparency” applied to cooperatives in the Netherlands. In this country, with its outstanding tradition of cooperation in agriculture and other sectors, transactions between members and their cooperative are exempt from all taxes, not only VAT. This gives recognition to the “not-for-profit” status of cooperatives and makes the 103 Agricultural Cooperatives in Transition Countries entire surplus available for distribution to members, without subjecting it to taxes on profit. Exemption from Retail Sales Tax Retail sales tax is common in Central Asian countries and the rest of CIS. Household plots are exempt from this tax by definition, whereas peasant farms, although legally liable, usually manage to avoid retail sales tax on their direct sales to consumers in the market. Avoidance becomes impossible when peasant farms (or even household plots) sell to legal bodies, such as processors or, in the future, marketing cooperatives: in such cases, the legal body pays the retail sales tax and passes this tax as an additional charge to members. However, sales to a processor or a marketing cooperative are in principle not retail sales: these are wholesale transactions and should be exempt from the retail sales tax. Yet, in reality, tax authorities enforce collection of retail sales tax also on wholesale transactions with processors. This issue must be resolved, as payment of retail sales tax on transactions with marketing cooperatives will place cooperative members (whether peasant farms or household plots) at a distinct disadvantage compared to non-members. It will also be necessary to exempt cooperatives from any retail sales tax on inputs delivered to members: this will have to be resolved in the spirit of “fiscal transparency” as in the VAT exemption amendment. Transactions between members and the cooperative – whether sale of products by members to the cooperative or sale of inputs by the cooperative to members – should not be subject to retail sales tax. This principle should be officially recognized and included in formal instructions to tax inspectors at all levels. Exemption of Distributions to Members from Profit Tax Although in principle cooperatives are non-profit organizations, their financial reports may show an accounting profit at the level of revenues and expenses (called “surplus” in cooperative accounting). This accounting profit is created because the cooperative may have initially underpaid its members for products delivered (expenses too low) or overcharged them for inputs supplied (revenues too high). In effect the accounting profit is the result of internal pricing decisions within the cooperative, and not profit in the usual economic sense of the term. As an example, let us consider the relations between member-farmers and their marketing service cooperative. Members produce independently on their plots and deliver their products (milk, vegetables, honey) to the cooperative. The members do not deal with retail sales to consumers: this function is entrusted to 104 7. Cooperative Development in Central Asia the marketing cooperative. Receiving the products from its members, the cooperative makes the first payment to members calculated on the basis of estimated market or near-market prices. This first-wave payment to members is an advance on account of products received: the final accounting is made at the end of a quarter or a year, when the cooperative prepares its financial report. If the financial report shows an accounting profit (“surplus” in Western cooperative terminology) after deducting the first-wave payments to the members and other operating expenses incurred by the cooperative during the period, this essentially indicates that the cooperative underpaid the members for the products delivered during the reporting period. The surplus in principle should be distributed as a second payment to the members in proportion to their deliveries to the cooperative. In the end, the members may receive from the cooperative a price higher than the market price that they would have received by selling independently to the consumers. If the financial report shows an accounting loss (i.e., “deficit” or negative “surplus”), this indicates that the cooperative overpaid the members for the products delivered during the reporting period. The deficit is also distributed to the members in proportion to their deliveries and is recorded as a debit entry in the accounts of each member, to be covered from next year sales or special funds maintained by the cooperative. The same considerations exactly apply to the relations between members and a supply cooperative, which purchases inputs (fertilizers, seeds, feed, etc.) from suppliers at wholesale prices and re-sells them to members. Members initially pay an advance to the cooperative to cover the estimated cost of the inputs (first-wave payments). If the financial report at the end of the period shows positive “surplus” (accounting profit), this means that the cooperative initially overcharged the members for the inputs and the “surplus” is distributed to the members in proportion to their purchases through the cooperative. This effectively lowers the end price that members pay to the cooperative for inputs. If the financial report shows a “deficit” (accounting loss), this means that the cooperative initially undercharged the members for their purchases and the “deficit” is also allocated to members in proportion to their purchases. A similar scheme is applied in other service cooperatives, including cooperatives that provide machinery services to members using a jointly owned pool of farm machines. Cooperatives do not know in advance, at the time of the actual transaction, how much to pay to members for product deliveries and how much to charge for input supplies and other services. Financial settlements with members are handled in two waves: the first-wave payments and charges are in the nature of an initial advance, and the final settlement is made at the end of the period, when the financial statements have been prepared. As a result, a service cooperative usually 105 Agricultural Cooperatives in Transition Countries presents a financial statement that shows a positive surplus (accounting profit) or a deficit (accounting loss) according to the scheme in Table 7.5. Table 7.5. Schematic “profit and loss” statement of a cooperative Marketing cooperative Revenues from sale of members’ products to third parties Costs: First-wave payments to members Operating costs of the cooperative Gross income (surplus/deficit) Supply cooperative Revenues: first-wave payments from members Costs: Paid to suppliers Operating costs of the cooperative Gross income (surplus/deficit) Gross income (^hoh^ in Russian) represents the surplus or deficit that is further allocated by three channels: 1) Allocation to the cooperative reserve fund or other capital funds (“retention of earnings” in standard accounting terminology). 2) Distribution to members in proportion to their share contribution to the cooperative capital (“dividends” in standard Western terminology; iZ_\u_ \uieZlu in Russian). 3) Patronage refunds (dhhi_jZlb\gu_ \uieZlu) in proportion to the members’ use of cooperative services (i.e., basically in proportion to firstwave payments to the members). The sum of the three amounts distributed to members is equal to gross income. Patronage refunds are determined as the difference between gross income and the first two allocations (Table 7.6). Table 7.6. Allocation of profit in a service cooperative Gross income: Less allocation to reserve fund and other funds Less distribution in proportion to share contribution (iZ_\u_ \uieZlu, “dividends”) Difference available for distribution as patronage refunds (dhhi_jZlb\gu_ \uieZlu) Conventional interpretation of the tax code will require the cooperative to pay tax on the full gross income at applicable rates. Recognition of the special nature of patronage refunds in cooperatives (as second-wave adjustment of initial overor under-payment to members) and the Dutch principle of “fiscal transparency” suggest that this component of gross income should not be taxable. Furthermore, the U.S. tax code recognizes “dividends” paid to members in agricultural cooperatives (but not other cooperatives) as non-taxable at the cooperative level, i.e., exempt from withholding taxes (Autry and Hall, 2009). If the Dutch and the U.S. tax principles are adopted, the cooperative will be required to pay tax only 106 7. Cooperative Development in Central Asia on the share of gross income retained in reserve fund and other capital funds. The amount retained in the reserve fund and other capital funds will be shown net after deduction of the appropriate taxes. Recognizing the need to exempt patronage refunds (dhhi_jZlb\gu_ \uieZlu) from taxation, the 2013 Law of Cooperatives in Tajikistan introduced an important provision in Art. 36(3): Payments to cooperative members in accordance with their participation in cooperative activities and payment of bonuses/honoraria to cooperative managers are treated as expenses. <uieZluqe_gZfdhhi_jZlb\Z\khhl\_lkl\bb kbomqZklb_f\ohayckl\_gghc^_yl_evghklb dhhi_jZlb\Zb\uieZlu\hagZ]jZ`^_gbc ^he`ghklgufebpZfdhhi_jZlb\Zhlghkylky djZkoh^Zfdhhi_jZlb\Z The explicit wording in the Law of Cooperatives is particularly important for achieving the desired effect as the 2005 Law of Cooperatives in Kyrgyzstan, for instance, contains a blanket statement deferring all tax-related decisions in cooperatives to the Tax Code (Article 32). The 2009 Tax Code of Kyrgyzstan indeed exempts agricultural service cooperatives from VAT on transactions with members (Article 239) and from retail sales tax (Article 259). It also exempts from taxation the profit of agricultural service cooperatives (Article 212), thus guaranteeing a special status for patronage refunds. Yet expert opinions in Kyrgyzstan indicate that these provisions are not observed in their entirety by tax inspectors, perhaps because they are relatively new and unfamiliar (the relevant version of the Tax Code was adopted in July 2009). The provision concerning exemption of patronage refunds from profit tax in Tajikistan, in addition to the proposed VAT and retail sales tax amendments, is a very important step toward establishing “fiscal transparency” for cooperatives. To be effective, this provision must be incorporated as an amendment in the Tax Code (following the example of Kyrgyzstan): expert opinions suggest that tax authorities in Tajikistan (and probably also in other countries in Central Asia) refuse to follow provisions in specific laws unless they are also reflected in the Tax Code and the courts are reluctant to rule against the tax authorities in such instances. We furthermore recommend following the U.S. practice and exempt share payments (iZ_\u_ \uieZlu) from taxation in agricultural service cooperatives. 107 Agricultural Cooperatives in Transition Countries Observations from the Field: Cooperatives in Tajikistan and Kyrgyzstan Agricultural development strategies in both Tajikistan and Kyrgyzstan emphasize the development of service cooperatives as one of the priorities (Tajikistan Strategy, 2011; Kyrgyzstan Strategy, 2012). This obviously strengthens the need for precise and consistent definitions of different types of cooperatives in national legislation and emphasizes the urgency of resolving the taxation issues. This section describes the cooperative scene in Tajikistan and Kyrgyzstan as it emerges from recent field visits and interviews. Fledgling Service Cooperatives in Tajikistan10 Several donor organizations work actively on the establishment of agricultural service cooperatives in Tajikistan. These include Acted, OSCE, GIZ/TAFF, and the Aga Khan Foundation. Unfortunately donor experiences and monitoring efforts have not been documented (with the possible exception of the GIZ/TAFF TAG groups) and it is very difficult to analyze the actual achievements of these efforts so far. It is even impossible to map the existing donor-established cooperatives across Tajikistan to get a sense of spread and coverage. Visits to northern Tajikistan (Khatlon, Sughd, and Rasht provinces) have revealed the existence of authentic service cooperatives created bottom-up by groups of local farmers. N One example is an apricot-drying cooperative (registered as a consumer cooperative) with a membership of 20 independent apricot growers, which operates jointly owned apricot-drying and almond-extracting equipment. It bags and sells dried apricots and almonds extracted from apricot pits, actively looking for trade outlets and export opportunities. In addition to marketing activities, it also supplies fertilizer to its members. It is officially registered as a consumer cooperative. N Another example is a machinery pool with several pieces of farm machinery that provides mechanized field services to its members and also to non-members (charging 30% higher prices). The machinery coop also sells fertilizer and fuel to members, charging a mere 2% markup. In an attempt to ensure sustainability, the cooperative has applied for land to develop an apricot orchard: its strategy thus includes diversifying into 10 This section is based on impressions from field visits in northern Tajikistan organized by FAO-TJ in March 2012. 108 7. Cooperative Development in Central Asia production activities as a mixed service/production cooperative, which highlights the prevailing confusion between different types of cooperatives. N A vivid illustration of the bottom-up approach is provided by the “interest group” of some 20 small peasant farmers in Rasht Province, each with 1-2 hectares of land, who organized (with assistance from the Aga Khan Foundation) to overcome the bottleneck with access to quality seed potatoes and to renovate an existing potato storage facility. The “interest group” initially did not register as a coop, because members decided to accumulate some experience before applying to the Ministry of Justice for formal registration. The cooperatives interviewed in northern Tajikistan are typically managed by former collective-farm specialists (agronomists or livestock professionals) identified by the donor organizations. These specialists capitalize on their professional experience by providing agricultural extension and advisory services to local farmers (both members and non-members) through donor-sponsored networks or associations. A different example of village-level cooperative activities in Tajikistan is provided by livestock herding as practiced everywhere across the country: animals are collected from the village households and taken to pasture every morning by a herder (chaban), who is typically one of the village residents with cattle. The responsibility for the day’s herding rotates among the families in the village. This cooperative organization relieves the individual farmers from routine responsibility for herding their animals, just as produce collection by a marketing cooperative relieves them from the responsibility of traveling to the town market. Yet the cooperative grazing scheme in itself does not prevent unsustainable use of the common pastures where the animals graze. This second objective was achieved in an inventive way through the establishment of livestock committees (“associations”) in Muminabad (a district in the east-central part of Khatlon Province). The local livestock committee is responsible for dividing the common pasture into ten fenced segments and establishing a grazing rota, so that on any given day animals graze on one segment, while the other segments are allowed to rest and recover (the rotation cycle is 5-7 days on each segment). The livestock “cooperative” does not own any cattle – the animals remain in the ownership of the village households. Yet the cooperative’s pasture planning activities provide an important service to the members by promoting sustainable pasture 109 Agricultural Cooperatives in Transition Countries management and preserving pasture quality in the long run.11 In addition to rotational grazing, the association used cooperative funds to establish watering points and shelter for the animals, as well as initiate alfalfa seeding to improve the nitrogen content of the pasture soil. The cooperatives in Tajikistan are fledgling efforts which are badly in need of training and guidance. The general feeling is that cooperatives, once launched fairly effectively with donor assistance, are left pretty much on their own, without follow-up assistance, monitoring, and guidance. Cooperative managers naturally complain of difficulties with purchasing machinery or raising credit, but beyond that it is clear that they are untrained and without experiencing in managing a service cooperative. All cooperatives have formal business plans, but managers need training and guidance on how to implement the plans and how to work toward achieving their strategic objectives. Training and learning programs are needed for existing and potential cooperative managers (and also members). The field impressions in Tajikistan can be summarized as follows: N the new cooperatives in Tajikistan are voluntary grass-roots initiatives, created with initial donor guidance and financial support; N they mainly engage in delivery of services, not joint production; N they are often informal and created in a sporadic manner; N they are characterized by small scale and limited scope of operations. All these features place the new cooperatives in Tajikistan in stark contrast to all-pervasive mandatory cooperation of the socialist era. Dominance of Production Cooperatives in Kyrgyzstan 12 Some statistics on cooperatives in Kyrgyzstan have been available from two sources: a special unit dealing with cooperative development in the Ministry of Agricultural (largely without proper budgets or strategic guidance since 2008) and National Statistics Committee (NSC). MinAg reports the number of registered cooperatives, which showed impressive growth over time, rising from about 300 in 2004 to 1,300 in 2009 (Figure 7.3). 13 NSC, on the other hand, based its 11 The livestock associations were initiated by a project of Caritas Switzerland, which has since ended. There is no evidence that, despite its promise, the original rotational grazing scheme has been adopted in other parts of Tajikistan. For more information, see WOCAT (2010a, 2010b). 12 This section draws on official data from the Ministry of Agriculture of Kyrgyzstan and the National Statistics Committee, as well as field data from a survey of cooperatives and peasant farms conducted by FAO/REU in the spring of 2012 across the country. 13 These numbers do not include credit unions, created mainly by the Raiffeisen Foundation in Kyrgyzstan (some 300 in 2009). 110 7. Cooperative Development in Central Asia reporting on the number of active (operating) cooperatives. The gap between the two sources is dramatic (Figure 7.3): in 2011, MinAg reported more than 1,400 registered cooperatives, while according to NSC there were just 400 active cooperatives in the country (Kyrgyzstan in Numbers, 2012). It thus became apparent that more than 70% of registered cooperatives in Kyrgyzstan were inactive and existed only on paper, presumably with the intent of taking advantage of future credit or taxation benefits that might materialize through government policies. Figure 7.3. Development of cooperatives in Kyrgyzstan 20042011. Blue bars: registered cooperatives from MinAg; red bar: active cooperatives from National Statistics Committee (Kyrgyzstan in Numbers, 2012). The dominant majority of registered cooperatives in MinAg statistics are production cooperatives, not service cooperatives. In 2009, 88% of the registered cooperatives were classified as production cooperatives and only 12% were service and processing cooperatives. Unfortunately, the existing statistics are limited to the number of cooperatives: there are no data on land endowments, sales volumes, or the size of membership. Special surveys have to be conducted to elicit any functional information. FAO initiated such a survey of cooperatives in (FAO/REU survey, 2012). The survey focused on 400 active cooperatives in the NSC database. The original objective was to survey a sample of 100 cooperatives, collecting information mainly on service cooperatives, with control information on some production cooperatives. This objective could not be achieved, however, because virtually no pure service cooperatives were found in the NSC database. Among 400 active cooperatives only 17 were identified as mixed service/production cooperatives and 3 as trade/service cooperatives (these were apparently closest to pure service cooperatives). All these 20 service-oriented cooperatives were included in the 111 Agricultural Cooperatives in Transition Countries sample, which additionally included 37 production cooperatives for a total of 57 respondents. In addition to cooperatives, the survey also covered 1,000 peasant farmers randomly selected across the country. These respondents provided insights on the relations between users and cooperatives. Judging by their asset base and activity profile, 52 of the 57 cooperatives in the sample were in fact production cooperatives. They all reported that they cultivated some agricultural land – a clear distinguishing characteristic of a production cooperative. The land in cooperatives was typically contributed by the members, who were the source for 57% of total agricultural land in the sample; another 27% of land in cooperatives was leased from the municipality or the state. The land endowment was very large, averaging 7,000 hectares in the sample. Virtually all cooperatives (51 out of 57) reported that they engaged in agricultural production – predominantly crops, with mixed crop-livestock farming in 11 of the 51 cooperatives. In other words, practically all the cooperatives painstaking selected from official registers are actually production cooperatives, with not more than 6 out of 57 cooperatives in the sample possibly qualifying as service cooperatives (these are the six without primary production activities). In addition to primary production, all cooperatives reported providing services to both members and non-members. As explained in the discussion of cooperative organization, provision of services to members and non-members is a typical feature of production cooperatives and does not necessarily identify the cooperative as a service cooperative. A production cooperative, in addition to providing services to the joint production process where members work, also supplies inputs to individual production in members’ subsidiary household plots and sells some of its surplus inputs to non-members (for a higher price). Table 7.7 shows the percent of cooperatives in the sample that provide various services to their members and non-members. The frequency of services to members is substantially higher than the frequency of services to non-members (46% compared with 17% averaged over 14 service categories). The main services provided by more than 50% of cooperatives to members include marketing of farm products (sales, storage, packing, and processing), fertilizer application, mechanical field services, and transportation. Mechanical field services and transportation are also the most common services provided to non-members, presumably because the local production cooperative is the main source of farm machinery and vehicles in rural areas. This, combined with the relatively high percentage of cooperatives providing access to storage facilities for nonmembers, is a clear illustration of the positive role that cooperatives play in overall rural development. 112 7. Cooperative Development in Central Asia Table 7.7. Services provided by cooperatives in the sample (n=57) Category of service Sales of farm products Storage Packing Processing Fertilizer application Machinery services Transportation Soil melioration Information Veterinary Marketing services Purchased inputs Advisory Construction Average Source: FAO/REU survey (2012). For members 70 74 52 56 67 65 58 42 35 30 26 26 21 19 46 For non-members 19 23 21 18 12 28 33 21 19 9 12 5 11 5 17 Figure 7.4. Local service sufficiency increases with the percent of cooperatives that deliver the service. Source: FAO/REU survey (2012). A direct indication of the positive role that cooperatives play in rural life is provided by the results shown in Figure 7.4. Here each dot represents one of 15 different services, such as storage of farm products, machinery services, input purchases, product sales, and so on. For each of these services the cooperative managers were asked if their cooperative supplied the particular service and to what extent the local demand for the service was satisfied in their opinion (fully satisfied, partially satisfied, not satisfied). The vertical axis in Figure 7.4 plots the percentage of cases when the demand for each service was fully satisfied; the horizontal axis is the percentage of cases when the service was delivered by the coop. There is a clear positive correlation between the frequency of cases when the local demand for the service was fully satisfied and the frequency of cases 113 Agricultural Cooperatives in Transition Countries when the particular service was delivered by the coop. Service sufficiency thus clearly improves when cooperatives step in as service providers. Taxation and financial performance Two-thirds of cooperatives surveyed pay taxes, with land tax figuring as the main tax (67% of respondents). The next in importance is the obligatory social tax, which is reported by 40% of the cooperatives. Profit tax and VAT are reported by very few cooperatives (17% and 2%, respectively), which indicates that the tax code provisions explicitly exempting cooperatives from these taxes (see above) are generally observed. Taxes do not appear to be a major burden for cooperatives, as less than 10% listed reduction of taxes among the demands for support from the government. The main areas in which tax reductions were desired include purchase and leasing of farm machinery (18% of respondents), construction services (17%), and sales of farm products (16%). Fully 80% of cooperatives surveyed do not receive any support from the government and more than 40% state that they do not require any support. Between 10% and 15% of the cooperatives expect to receive government support in the form of subsidized prices, subsidized credit, and – importantly – training. All this can be interpreted as signs of satisfactory financial performance. Indeed, the majority of cooperatives (58%) report their financial situation as stable or profitable and only the remaining 42% are loss-making. Farmers’ attitudes toward cooperation Informal cooperation is quite widespread among farmers in Kyrgyzstan. Fully 22% of farmers surveyed participate informally in some joint activity with other nearby farmers (Figure 7.5). Joint use of farm machinery and transport facilities is the most common, reported by 17% and 14% of respondents respectively. Joint sales of farm products, joint purchase of inputs, and joint processing are also reported, although with lower frequency of between 5% and 10% of respondents. It is somewhat surprising to find that 10% of peasant farmers surveyed report informal cooperation in agricultural production outside a production cooperative. On the other hand, formal, organized cooperation is very limited among peasant farmers in Kyrgyzstan. Only 8% of the 1,000 farmers surveyed (78 respondents) are members of an agricultural cooperative and fully 50% do not belong to any association. It is noteworthy that 46% are members in Water User Associations, which presumably have established themselves as an effective 114 7. Cooperative Development in Central Asia institution for water management – not without large-scale promotion campaigns by the government and the World Bank. Figure 7.5. Informal cooperation in various activities among family farms. Source: FAO/REU survey (2012). Among the small number of farmers who are members of a formal cooperative (78 respondents), over 50% enjoy four main services: farm machinery, sales of farm products, supply of fertilizers, and quality seeds (Table 7.8). Furthermore, 56% of these farmers produce independently, i.e., they receive services from their cooperative without engaging in joint agricultural production. The survey thus distinguishes between two groups of cooperative members among peasant farmers: 44% are in effect members of a production cooperative and receive services as such; 56% are in effect members of a service cooperative, or rather a service component of a production cooperative: they receive services from the cooperative while continuing to produce independently. Table 7.8. Participation of cooperative members in various services and activities (percent of respondents) Area of cooperation All coop Members who members participate in joint production (n=78) (n=34) Joint production 44 Machinery for field work 59 Product sales 54 Seed supply 55 Fertilizer/chemicals supply 54 Ag processing 33 Animal feed 37 Average satisfaction rating Source: FAO/REU survey (2012). 100 85 79 88 88 56 65 Members who do not participate in joint production (n=44) 0 39 34 30 27 16 16 Satisfaction rating among those using the activity 59 61 64 67 62 58 55 61 Members in service cooperatives (i.e., those who do not participate in joint production) receive basically the same services as members in production 115 Agricultural Cooperatives in Transition Countries cooperatives. However, the frequency of these services for farmers who are only members of the service cooperative (i.e., do not participate in joint production) is lower than the frequency for those who participate in joint production, although the relative ranking is the same. In other words, farm machinery, sales of farm products, supply of fertilizers, and quality seeds are the most frequently enjoyed services for both groups of cooperative members. Cooperative members are generally satisfied with the services they receive from the cooperative: on average, over 60% of members who actually use the various services report that they are satisfied. Figure 7.6. Reasons for not becoming a cooperative member (n-922). Source: FAO/REU survey (2012). The large gap between the frequency of formal and informal cooperation (8% and 22% of farmers, respectively) clearly suggests that there is a large potential for development and adoption of service cooperatives in Kyrgyzstan. Why are farmers reluctant to join a cooperative? The main reason cited by the respondents is that there is no cooperative in the vicinity that they can join (55%; see Figure 7.6). The second most frequently cited reason is that the respondents wish to preserve their independence (42%), which probably reflects the ingrained influence of Soviet-style production cooperatives. Loss of independence does not apply to service cooperatives, and this reason is clearly a facet of the lack of clear understanding of the differences between service and production cooperatives. About 15% of respondents attribute their not joining a cooperative by insufficiency of information about cooperatives, which strengthens our contention that cooperative development requires a large-scale information campaign to familiarize the rural population with the workings of cooperatives. The universal issue of lack of trust in managers and other members is cited by more than 10% of respondents. Finally, the danger of increased taxation for cooperative members does not seem to be a problem: only 6% of respondents 116 7. Cooperative Development in Central Asia raise this issue. This finding for potential members is consistent with the generally relaxed attitude of cooperative members toward taxation (see above). Cooperative Development Policy for Central Asia World Practice and Central Asia In developed countries, the basic cooperative principle of voluntary membership has a broader meaning than simply the right of voluntary entry into an existing cooperative. This principle essentially signifies also voluntary creation of new cooperatives by groups of individuals with common interests and objectives. Cooperatives are created “bottom-up”, driven by the voluntary initiative of the users, and not “top-down”, according to formal cooperative development programs advocated by state organs. The Western approach to cooperative development is radically different from the approach observed in Kyrgyzstan, Tajikistan, and other Central Asian countries, where the government has a significant role in the “development of the cooperative movement” through central dictates and formal strategy documents. Furthermore, cooperative development strategies in Central Asia consistently advocate the creation of production cooperative as a cure to the fragmentation of land holdings; they put much less emphasis on the creation of service cooperatives as a means for improving market access for small farmers. The world experience clearly shows that cooperatives created “top-down” according to government programs seldom survive, and only cooperatives created “bottom-up” based on user initiative in rural areas have a chance of proving to be viable. The Western “bottom-up” approach to the creation of cooperative effectively limits the role of the government in this process. The government’s role is essentially restricted to organizing a broad information campaign in rural areas with the objective of acquainting the rural population with the advantages and benefits of membership in a service cooperative. Such an information campaign is necessary to neutralize the negative experience of the rural population with Soviet-period cooperatives and to clearly delineate the differences of Western, market-style service cooperatives from the production cooperatives in centrally planned economies. The information campaign should be reinforced by the development of information packages and materials intended for cooperative members and managers, including personnel training and education programs. A useful example of an information package for potential cooperators is a basic start-up guide on agricultural cooperatives developed by Agriculture Canada (processed). 117 Agricultural Cooperatives in Transition Countries The main responsibility for the organization of the information campaign, personnel training, and preparation of information materials rests with the government and appropriate public institutions (such as the national union of agricultural cooperatives in each country). International donors should support the government in this endeavor through their technical assistance and rural development programs. The USDA cooperative service in the U.S. (USDA, 2013), the Canadian Co-operative Association, and similar undertakings in the Netherlands (e.g., National Cooperative Council for Agriculture and Horticulture) and other developed countries provide a good model for Central Asia. Local government organs in rural areas should play a leading role in the proposed information campaign and in dissemination of cooperative principles among the population. These local organs should act at the village level as a conduit for disseminating the basic information received from the center and for motivating and encouraging the rural people through appropriate teaching and training to create service cooperatives by their own local forces. They should also stimulate exchange of information and experience between functioning cooperatives in the region. Together with district and provincial authorities, they can also contribute to the development of close relationships between local cooperatives and processors, exploiting the natural symbiosis between these organizations: cooperatives are suppliers of raw materials for processors, and the sale of farm products by processors is in turn a guarantee of viability for cooperatives. The envisaged role for local government organs requires allocation of adequate budgets and preparation of local cadres qualified to deal with the relevant tasks. Cooperative development efforts envisage the following role for government and international donors: N Providing general policy guidance and policy advice regarding the advantages and disadvantages of cooperatives, especially aiming to steer the policy makers from the idea of re-establishing large collective farms in the guise of production cooperatives N Providing instruction materials and specific technical advice on organization and functioning of cooperatives N Re-drafting the law of cooperatives and the civil code based on a combination of economic and legal considerations, with advice provided by experts from both fields. In addition to information and training, cooperative development may require certain financial support, including startup funds for the purchase of machinery 118 7. Cooperative Development in Central Asia and equipment, and also access to credit. The government and international donors should develop appropriate programs, including partial participation in machinery purchase through distribution of grants, leasing systems, and access to discretionary credits for investments and working capital. All these programs should be conditional on the ability of the cooperatives to generate own funds for partial financing of their requirements. Government and donor programs must not support deeply unprofitable or inactive cooperatives: grants and subsidies should be made available to healthy, fundamentally viable cooperatives, which ultimately will have sufficient own funds to finance their business activity, but which require temporary assistance to achieve sustainability. Strict targeting and monitoring of government financial support is essential. Previous efforts to provide startup funds and discretionary credits for the development of cooperatives in Kyrgyzstan during President Bakiev’s tenure (2008) have failed: their only effect was to create an artificial increase in the number of registered cooperatives willing to accept government money, without any noticeable impact on agricultural production or rural wellbeing (Beyshenaly and Namazova, 2012). They furthermore gave rise to corruption, as enterprising farmers tried to secure government funds by less than legitimate means. Government support funds are used in the West to help new cooperatives: USDA (2013) gives a long list of support instruments available to qualifying cooperatives. It is certainly possible to institute similar financial support instruments in Central Asia, but this requires a radical change in the attitude of government officials: distribution of support must be totally impartial and objective. Support should go to cooperatives that have proved their ability to function, cooperatives that are capable of providing matching funds of their own, and cooperatives that can present credible business plans for development. Government funds should not be granted from considerations of political or personal favoritism. As long as conditions in government circles are not ripe for such impartial and objective distribution of financial support, it is better to have governments concentrate entirely on information, teaching, and training of potential cooperators. Promoting Cooperatives: Information Campaign and Legal Framework for Cooperatives Efforts to promote the development of service cooperatives naturally require a proper legal framework. The national cooperative laws, as well as the civil codes, should clearly and unambiguously define the three main types of cooperatives that exist in market economies: 119 Agricultural Cooperatives in Transition Countries N Service cooperatives N Consumer cooperatives (a variant of service cooperatives) N Production cooperatives The classification should be based primarily on functional characteristics (what the different cooperatives do) and should disassociate itself from the inherited Soviet-era classification (as reflected in the legacy of the so-called consumer cooperation system). Legal experts working on cooperative legislation issues in Central Asia should study the example of Kyrgyzstan’s Civil Code, where the 1999 amendments reduced the discussion of cooperatives to the bare legal minimum (a cooperative is a legal body that may be either a commercial or a non-commercial organization) and left all the functional and organizational details to the law of cooperatives. In Central Asia, as in all CIS countries, the notion of cooperative automatically raises the connotation of a “production cooperative” or the collective farm that enjoyed such an unfavorable reputation during the Soviet era. The agricultural reform strategies aim at establishing a different type of cooperatives – service cooperatives, whose function is to provide farm services without in any way depriving farmers of independence in all production activities. The implementation of the strategy to encourage the development of service cooperatives should therefore start with a broad information campaign in rural areas, intended to explain the new notion of cooperative and to elaborate on the advantages of becoming a member. This information campaign is basically the responsibility of the government, but donors should naturally be invited to utilize their experience with the establishment of cooperatives and help with funding. Beyond initial training and learning, it is necessary to establish permanent information services for members and managers. These information services should focus on the following areas: N N N N Market information Relations with banks Taxation Legal issues The USDA Cooperative Service in the U.S. (USDA, 2013) and similar cooperative services in Canada, the Netherlands and other EU countries are good models for the establishment of permanent cooperative services in Central Asia. As part of information and training services, it is necessary to establish mechanisms for systematic experience sharing among existing cooperatives. A successful cooperative is an excellent example that should be followed by other 120 7. Cooperative Development in Central Asia existing or potential cooperatives – but this example should be advertised through experience sharing among others. The feeling from field visits in Tajikistan is that today the existing cooperatives operate largely on their own, without joining their forces with neighboring cooperatives (as is inherent in all cooperative systems in the world). One example is a dried-apricot marketing cooperative in northern Tajikistan (Sughd), which had to refuse a large export order because it did not have enough capacity to deliver the required volume. Curiously, the cooperative manager did not think it feasible to connect with one or two neighboring cooperatives to make up the missing volume. Experience-sharing efforts should also emphasize the advantages of joining forces among cooperatives. In addition to information support and human-capital development, fledgling cooperatives may require assistance with physical capital, including machinery, equipment, and access to credit. Programs should be put in place to provide seed money for the establishment of new cooperatives. In this context the Acted model in Tajikistan appears particularly promising: cooperatives paid from their own funds about one-third of the value of equipment provided by Acted, and the remaining two-third were a grant from the donor. Credit facilities should be established to help cooperatives finance their investment and working capital needs at reasonable rates. Access to these facilities should be linked to the cooperative’s ability to generate its own matching funds (as with the requirement of contributing a share of machinery costs). All these efforts may require cooperation between the government and the donors. Development of a Multi-level Cooperative System for Denser Coverage Although service cooperatives and private service providers are definitely spreading in Central Asia, the coverage so far is very sparse. The example of Tajikistan shows that a machinery cooperative or a private machinery service provider may exist in one or two villages – with absolutely nothing in any of the other villages in the administrative district. Central Asian countries need a much denser network of service providers – cooperative or private – for its farmers and rural population. A distinct advantage of cooperatives is that they are naturally adapted to scaling up to a multi-level hierarchy: small, easily established, lowinvestment village-level cooperatives can form larger, more capital-intensive second-level cooperatives that will scale up the first-level services to a cluster of villages or the whole district. Take the example of a dairy cooperative system: first-level cooperatives in villages simply need a refrigerated tank for milk collection from households and farms; the second-level cooperative will have to invest a refrigerated tanker for collecting milk from the village-level cooperatives and transporting it to the central processing facility. In this way, the investment 121 Agricultural Cooperatives in Transition Countries costs are spread over the two-level system, without unduly overburdening any of the cooperatives. The cooperative system in market economies is usually made up of a hierarchical structure consisting of several levels. The bottom level consists of the “local” or primary cooperatives, i.e., cooperatives created by producers “bottomup” in villages. The next level are the “regional” cooperatives, which are created by local cooperatives from considerations of economies of scale. Thus, processing enterprises (a dairy, a flour mill, a fruit-and-vegetable canning factory) are not needed in every village: one enterprise can serve processors from many villages in the same region, accepting deliveries from lower-level local cooperatives. Regional (or secondary) cooperatives in turn may associate in tertiary (nationallevel) cooperatives, whose role is to represent the interests of local and regional cooperatives to the government (i.e., lobbying) and deal with general issues of economic and organizational development (e.g., export promotion). These national cooperatives are notionally similar to the cooperative “unions” introduced in the CIS legislation on consumer cooperation, with one significant difference: the entire multi-level cooperative system in market economies evolves “bottom-up”, starting with local primary cooperatives created by producers in villages, whereas “consumer unions” in CIS legislation are guided by Soviet ideology and created “top-down” by state dictates. References Abele, S. and Frohberg, K., eds. (2003). Subsistence Agriculture in Central and Eastern Europe: How to Break the Vicious Circle, Studies on the Agricultural and Food Sector in Central and Eastern Europe, Vol. 22, IAMO, Halle. Agriculture Canada (processed). Agricultural Co-operatives: A Startup Guide www.agf.gov.bc.ca/busmgmt/bus_arrange/bus_arrang_pdf/coop1.pdf Autrey C. and Hall, R. (2009). The Law of Cooperatives, American Bar Association: Business Law Section, Chicago, IL. Beyshenaly, N. and Namazova, B. (2012). Development of Agricultural Cooperatives in the Kyrgyz Republic [in Russian], IAIR – Institute for Analysis and Development Initiatives, Bishkek. Cobia, D., ed. (1989). Cooperatives in Agriculture, Prentice Hall, Englewood Cliffs, NJ. EBRD (2012). Transition Report 2012: Integration Across Borders, European Bank for Reconstruction and Development, London. FAO/REU survey (2012). Survey of registered cooperatives and peasant farms across Kyrgyzstan, implemented by El-Pikir, Bishkek. 122 7. Cooperative Development in Central Asia ICA (2013). “Co-operative identity, values & principles,” International Cooperative Alliance. http://ica.coop/en/what-co-op/co-operative-identityvalues-principles Kyrgyzstan in Numbers (2012). Kyrgyzstan v Tsifrakh 2007-2001 [Russian], Statistical yearbook, National Statistics Committee of Kyrgyzstan, Bishkek. Kyrgyzstan Strategy (2012). Agro-Business Development Strategy for Kyrgyzstan 2013-2020 [in Russian], Ministry of Agriculture and Melioration of the Republic of Kyrgyzstan, prepared with FAO Technical Assistance, Bishkek. Lerman, Z. and Sedik, D. (2009). Agricultural Recovery and Individual Land Tenure: Lessons from Central Asia, FAO/REU Policy Studies in Rural Transition No. 2009-3, FAO Regional Office for Europe and Central Asia, Rome-Budapest. http://www.fao.org/fileadmin/user_upload/Europe/documents/Publications/P olicy_Stdies/AgDevelopmentCA_en.pdf Mather, J.W., K.C. DeVille, A.L. Gessner, and C.C. Adams (2004). Farm Marketing, Supply and Service Cooperative Historical Statistics, USDA, Cooperative Information Report 1, Washington, DC. Plunkett Foundation, 1995. Review of 1994 Activities, Plunkett Foundation, Oxford. Tajikistan Strategy (2011). “Resolution of the International Conference on Agrarian Reform in the Republic of Tajikistan, Dushanbe, 15 April 2011”, prepared with technical assistance from FAO and the Donor Coordination Council, Dushanbe. USDA (2013). USDA Rural Development: Cooperatives, USDA Rural Development web site. http://www.rurdev.usda.gov/LP_CoopPrograms.html Van Bekkum, O. and Van Dijk, G. (1997). Agricultural Co-operatives in the European Union, Van Gorcum, Assen. WOCAT (2010a). “Rotational grazing supported by additional water points” http://qt.wocat.net/qt_summary.php?lang=english&qt_id=148 WOCAT (2010b). “Livestock committee at village level.” http://qa.wocat.net/SummaryApproach.php?selected_id=269 123 8. Cooperative Development in Tajikistan Zvi Lerman (2012) The Role of Cooperatives as Service Providers In developed market economies, farmers do not typically meet face to face with the consumer in the market place and access to markets is achieved through private intermediaries. Such private intermediaries are beginning to emerge in Tajikistan in several forms. First and foremost, they include “integrators”, i.e., traders who visit the farms with their trucks and purchase farm products wholesale for subsequent resale to retail customers. In a similar category, there are private processors (e.g., dairies, meat packers, canning factories) that make arrangements with farms to buy their products wholesale. On the supply side there are organizations that rent machinery services to small farmers as needed and “distributors” who purchase inputs wholesales and resell them to farmers in the villages. Some distributors actually deliver supplies to the remote villages; others establish small distribution “centers” for sale of feed or fertilizers in nearby villages and thus minimize the travel time for farmers. Another important category of private service providers are extension experts: former kolkhoz specialists (agronomists, livestock scientists) now act as private consultants providing paid advisory services to farmers. All these private service providers fulfill a crucial function for rural development: they free the farmers from the need to travel to the marketplace and enable them to concentrate efficiently on their core business – agricultural production. Government policies should be directed to encourage and facilitate the operation of such intermediaries – by simplifying licensing arrangements, implementing more flexible inspection procedures, cultivating a generally friendly and helpful attitude among the local officials, and perhaps granting tax credits on transactions with agricultural producers. The government should also 124 8. Cooperative Development in Tajikistan consider establishing special credit facilities for expansion of business activities of such rural intermediaries. So far, however, such private rural intermediaries are relatively rare and do not satisfy the needs of the huge number of smallholders – dehkan farms and household plots in Tajikistan. Donors try to supplement the private service providers by establishing networks of advisory centers and supporting the creation of machinery services with grants and credits. These efforts, however, have a very limited regional scope and are more in the nature of pilot efforts without a clear strategy for national rollout (the GIZ/TAFF vigorously expanding TAG network appears to be an exception to this rule). The most impressive achievements have been recorded by donors in the area of establishment of legal consulting centers (USAID, Helvetas): this is obviously a very important advisory function, but unfortunately it has no direct impact on farmers’ access to market services. Even in market economies private service providers do not always reach every remote rural location. In such cases, local farmers take the initiative and organize self-help bodies – so-called service cooperatives – whose function is to allow alternative access to markets without relying on private service intermediaries. Decades of experience in all developed and developing market economies show that farmers’ service cooperatives are the best mechanism to access market services in areas where no private intermediaries operate or where private intermediaries unfairly exploit farmers through monopolistic practices. While farmers obviously need guidance on how to create cooperatives and new cooperatives may require support through grants or subsidized credit from donors or the government, the self-organizing nature of the system of cooperatives ensures relatively easy rollout to remote rural locations. The concept of cooperatives is discussed in more detail in the next section. Creation of Cooperatives Best-practice world experience suggests that farmers’ service cooperatives provide the most effective way of improving the access of small farmers to market services. Such cooperatives can cover the whole field-to-market value chain, including joint purchase of farm inputs, attention to water distribution and irrigation (through Waster User Associations), organization of machinery pools for field work, establishment of sorting and packing facilities, transport of farm products to markets and processing. They can also provide extension and market information services, as well as veterinary and artificial insemination services, all of which are essential for productivity improvement in both crop and livestock production. Service cooperatives do not rule out private initiative: private trade 125 Agricultural Cooperatives in Transition Countries intermediaries, integrators, and service providers may co-exist with service cooperatives and continue their currently developing operations. The main issue here is the attitude of the government. It has to undergo a radical change from neglect and disdain of household plots and small farmers to full recognition of the huge role that small farms play in Tajikistan’s agriculture. Government officials and decision makers have to acknowledge the contribution and importance of small farms, abandon the traditional preference for large farms, and focus on policies that ensure a supportive market environment for successful operation of the small-farm sector – including policies to encourage creation of service cooperatives. This change of attitude will require a comprehensive “re-education” effort in all ministries and should probably be guided from the level of the central government. Western Classification of Cooperatives International Cooperative Alliance (ICA) defines a cooperative as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically-controlled enterprise. The persons who voluntarily unite to form a cooperative are usually referred to as members or member-owners, and one of the key attributes of membership is active participation in the activity of the cooperative (whether economic, business, or social). A cooperative is a legal entity and in a certain sense it is an analogue of a shareholder corporation. There are, however, some fundamental differences between a cooperative and a corporation, as listed in Table 8.1. Perhaps the main difference concerns the organization’s objective: while business corporations aim to maximize their profit, cooperatives aim to maximize the benefits that members derive from their participation in cooperative activities, including lower prices paid for inputs and services and higher prices received for products. The Western cooperative paradigm distinguishes between production cooperatives, service cooperatives, and consumer cooperatives based on their functional characteristics. Production cooperatives are cooperatives in which members are jointly engaged in the production process – irrespective of whether this is production of manufactured goods, agricultural products, or services. These may include: 126 8. Cooperative Development in Tajikistan Table 8.1. Comparative attributes of a cooperative and a shareholder corporation Attribute Owners Owners’ objective Organization’s objective Voting rights Income distribution rules Cooperative Members Use of services provided by the cooperative Maximize members’ benefits from working with the cooperative One member–one vote, regardless of share contribution Income distributed to members in proportion to their participation in the activity of the cooperative Corporation Shareholders–investors Earning income Maximize corporate profits Number of votes proportional to number of shares (i.e., share contribution) Income distributed to shareholders in proportion to the number of shares held N Manufacturing cooperatives are usually called employee owned or labor managed firms. They used to be very popular in former Yugoslavia before 1989, but they are also observed in Western countries (Mondragon Cooperative Corporation in Spain, Ha’Argaz Metal Works in Israel, and others). N In agricultural production cooperatives members jointly cultivate cooperatively held agricultural resources, such as land or farm machinery, producing a variety of farm products. Collective farms in the former Soviet Union and kibbutzim in Israel are some examples of agricultural production cooperatives. N Cooperatives that produce services for sale to the general public (Avis Rent-A-Car world-wide, United Airlines in the U.S., Egged Transportation Cooperative in Israel, and others) are usually characterized as employee owned or labor managed cooperatives: they are not called “service cooperatives”, because this term is reserved for cooperatives that sell services to members (the sales clientele criterion). Production cooperatives sell their output to outsiders; yet the main function of production cooperatives is to improve the wellbeing of their members by providing jobs and working conditions that are superior to what would otherwise be available in the market. Production cooperatives in the world are a tiny minority among organizations that produce manufactured goods, agricultural products, or services. Service cooperatives, on the other hand, are the largest and most typical category of cooperatives: these are cooperatives that provide services to their 127 Agricultural Cooperatives in Transition Countries 14 members-producers, who carry out all production activities independently on their own. In contrast to the minor role of production cooperatives in market economies, service cooperatives in many countries account for a large share of transactions in the relevant economic sector: for instance, agricultural marketing, processing, and supply cooperatives (see below) are major players in markets for farm products and farm inputs in North America, Western Europe, Japan, and South-East Asia. Some members may actually be employed as workers in service cooperatives, but most employees (and even most managers) are hired outsiders. Service cooperatives use members’ share contributions to capital and borrowed funds to finance purchase of goods and services from various market sources and then resell these services to members at advantageous prices. Service cooperatives exist in many different areas of economic activity. Agricultural service cooperatives are usually subdivided into: N Marketing cooperatives: cooperatives that collect and prepare members’ produce for sale, truck it to the market, and arrange for actual sale at prices that are higher than what would be normally attained by the farmers themselves; N Processing cooperatives: cooperatives that buy members’ produce for processing (often vertically integrated as the last downstream link in marketing cooperatives); N Input Supply cooperatives: cooperatives that exploit the benefits of size to purchase inputs (fertilizers, chemicals, fuel, seeds, animal feed, etc.) or specialized services (veterinary medicine, artificial insemination) at prices and terms beneficial to members-producers; N Machinery cooperatives (or machinery pools): pools (fleets) of farm machinery jointly owned by groups of members in situations when it is too expensive or too inefficient for each farmer to purchase machinery independently; N Extension and information management cooperatives: services to upgrade the human capital of cooperative membership through training, education, knowledge exchange, and management information technologies provided by hired experts. Examples of service cooperatives outside agriculture include: 14 For this reason, service cooperatives are sometimes called in English “producer’s cooperatives” (as distinct from “production cooperatives”), or “farmer’s cooperatives” in agriculture. In Russian this term would be translated as dhhi_jZlb\u ijhba\h^bl_e_c (kooperativy proizvoditelei), to distinguish it from ijhba\h^kl\_ggu_ dhhi_jZlb\u (proizvodstvennye kooperativy), which is the accepted Russian term for “production cooperatives”. 128 8. Cooperative Development in Tajikistan N N N N N N N N N N rural electric power cooperatives, renewable energy cooperatives, rural telephone cooperatives, healthcare cooperatives (the cooperative hires healthcare professionals for the benefit of its members), housing cooperatives cooperative schools, nurseries, child-care facilities, cooperative art galleries (a “marketing cooperative” for art “produced” by member artists) credit unions and cooperative banks cooperative (mutual) insurance companies auditing and accounting cooperatives (usually serving other cooperatives, not individuals) Consumer cooperatives are trading firms that sell consumer goods primarily to their members at advantageous prices. They are basically a variety of supply cooperatives (outside agriculture), but they are treated as a separate class because of their numerical importance in the world. The largest segment of consumer cooperatives is cooperative food stores and supermarkets (“grocery stores”), but cooperative stores that sell clothes, housewares, appliances, and even cars to their members – at advantageous prices – also fall in the category of consumer cooperatives. In the West, consumer cooperatives, unlike other service cooperatives, are probably most likely to deal with non-members (“third parties”) on a regular basis: this is their strategy of achieving growth comparable with other firms in the consumer services sector. Classification of Cooperatives in Republic of Tajikistan Legislation Clear unambiguous definition of different types of cooperatives – production, service, and consumer – is essential to ensure acceptance of the concept of cooperatives by the rural population. In market economies, the term “cooperative” is automatically interpreted as a service cooperative. In Tajikistan and all CIS countries, the term “cooperative” is automatically interpreted as a production cooperative – the model of a former kolkhoz or collective farm. Having been exposed for decades to the negative experience with such “production cooperatives”, rural people may persist in their negative view of the whole concept of cooperatives and reject any proposals to form cooperatives, even when the intention is to create service cooperatives, not old-style production cooperatives. The new legislative framework must acknowledge this 129 Agricultural Cooperatives in Transition Countries psychological barrier to cooperatives by introducing unambiguous definitions that will prevent any possibility of misunderstanding or misinterpreting the strategic intentions. The draft law of cooperatives (Art. 2(1)) adopts the general definition of cooperative as advocated by ICA (see above). This is a good start, but it is not new, as the standard ICA definition has been always accepted since the Soviet times. Beyond the universally accepted general definition, the new draft law, following the 1999 Civil Code and the Soviet-era practice (e.g., the 1988 USSR Law on Cooperation), classifies cooperatives into two distinct categories: (a) production cooperatives (proizvodstvennye kooperativy) and (b) consumer cooperatives (potrebitel’skie kooperativy). Unfortunately, the meaning that the new draft law imparts to these two familiar-sounding terms is different from the accepted meaning in Western usage. Furthermore, the term service cooperative is not mentioned in the new draft law. The draft law (Article 2) does not examine the functional features of the different cooperatives and instead employs the formal classification attributes shown in Table 8.2. Tajikistan’s legislation thus classifies cooperatives by their profit-making attributes (“for profit” and “not-for-profit”) and by their sales clientele (third parties or members), assuming in both cases that the respective attributes are mutually exclusive and allow cooperatives to be classified into two disjoint groups. Unfortunately, the two attributes are ambiguous and fuzzy for cooperatives. Table 8.2. Classification of cooperatives in Tajikistan’s legislation (Civil Code and draft Law of Cooperatives) Production cooperatives Legal body Commercial (“for profit”) organization Sales to third parties only Consumer cooperatives Legal body Non-commercial (“not-for-profit”) organization Sales to members only (must transform into a production cooperatives if sales primarily to third parties) The notion of profit in a cooperative is vague and unclear. Some international authorities argue that all cooperatives are essentially not-for-profit, because their goal is to maximize the members’ benefits by lowering the prices that they charge and raising the prices that they pay. Profits are reduced to zero (or almost zero) by this pricing policy. 15 Furthermore, there is no reason to assume a difference in profit orientation between the two groups of production and consumer 15 Professor Muenkner noted in his materials for the Working Group on Cooperatives (SeptemberNovember 2011) that the Civil Code of Switzerland (OR Art. 828) specifically defines all cooperative as not-for-profit. 130 8. Cooperative Development in Tajikistan cooperatives: under the current Law on Consumer Cooperation consumer cooperatives include retail and wholesale traders, providers of food and other services, traders in consumer goods, etc., which in principle are not less profitmaking than other cooperatives. The attributes of “for-profit” (commercial) and “not-for-profit” (non-commercial) are too ambiguous to be used as classification attributes for cooperatives and should be removed from future legislative drafts. Table 8.3. Functions of “production cooperative” as defined in the 1999 Civil Code of Tajikistan (Art. 118) and their classification according to Western views of production, service, and consumer cooperatives Functions of “production cooperative” according to Civil Code of Tajikistan Production Processing Sale of products Contract jobs, custom work Trade For and with producers For and with consumers Consumer goods and services Other services Services to producers Services to consumers, general population Western classification of respective functions Production cooperative Service cooperative Service cooperative Service cooperative Depends on specifics Service cooperative Consumer cooperative Consumer cooperative Depends on specifics Service cooperative Consumer cooperative There are also difficulties with the sales clientele attribute (“production cooperatives” selling mainly to third parties versus “consumer cooperatives” selling mainly to members). Production cooperatives in the sense of cooperatives in which members produce goods or services indeed sell their output to outsiders, i.e., third parties. But this is the Western definition of production cooperative, whereas in RT legislation (Civil Code, Article 118) production cooperatives also engage in processing and sale of agricultural products, contract work (e.g., plowing or harvesting), trade, provision of services, and other activities that do not involve production – activities that mainly target members – not third parties – as the sales clientele. In Western nomenclature these cooperatives are called service cooperatives, not production cooperatives (Table 8.3), and they are definitely member-oriented in their sales, whereas the Civil Code puts them in the category of production cooperatives that are supposed to sell to third parties only. Finally, consumer cooperatives in the sense of food and other retail traders (as defined in the West) indeed sell to members, but the proportion of non-member sales in these cooperatives is steadily growing and according to RT legislation eventually they will have to be transformed into production cooperatives – although they do not engage in any production. These terminological 131 Agricultural Cooperatives in Transition Countries inconsistencies suggest that the feature of selling to third parties vs. selling to members should also be dropped as a classification attribute for cooperatives. The terms “production cooperative” and “consumer cooperative” as used in Tajik legislation and as imported into the draft law of cooperatives are totally inconsistent with the accepted Western terminology. The best option is to introduce a consistent set of definitions of service, consumer, and production cooperatives into Tajik legislation, based on functional features (including appropriate amendments in the Civil Code). An alternative (“second best”) approach is to omit the terms “production cooperative” and “consumer cooperative” from the draft law and to treat cooperatives generally as noncommercial (“not-for-profit”) legal entities (the category of exceptional cooperatives that do business mainly with non-members may be regarded as commercial – “for profit” – legal entities). This, however, would involve explicit recognition of the fact that cooperatives, although “non-commercial”, may have income (accounting profit, ^hoh^ in Russian), which is ultimately distributed to members as refunds for their participation in the activity of the cooperative. The definitions of “production cooperative” and “consumer cooperative” introduced in the draft Law of Cooperatives (see Table 8.6) are different not only from the accepted Western definitions: they are also different from the definitions used in the Civil Code. They will necessarily require amendment of the Civil Code, without achieving the desired consistency with Western terminology and market classification of cooperatives. Since the Civil Code will have to be amended anyhow, it is strongly recommended to go the extra mile and prepare amendments that will ensure terminological and conceptual consistency between Western concepts and RT legislation. Relations and Cash Flows Between Members and the Cooperative As an example, let us consider the relations between member-farmers and their marketing service cooperative. Members produce independently on their plots and deliver their products (milk, vegetables, honey) to the cooperative. The members do not deal with retail sales to consumers: this function is entrusted to the marketing cooperative. Receiving the products from its members, the cooperative makes the first payment to members calculated on the basis of estimated market or near-market prices. This first-wave payment to members is an advance on account of products received: the final accounting is made at the end of a quarter or a year, when the cooperative prepares its financial report. If the financial report shows an accounting profit (“surplus” in Western cooperative 132 8. Cooperative Development in Tajikistan terminology) after deducting the first-wave payments to the members and other operating expenses incurred by the cooperative during the period, this essentially indicates that the cooperative underpaid the members for the products delivered during the reporting period. The surplus in principle should be distributed as a second payment to the members in proportion to their deliveries to the cooperative. In the end, the members may receive from the cooperative a price higher than the market price that they would have received by selling independently to the consumers. If the financial report shows an accounting loss (i.e., “deficit” or negative “surplus”), this indicates that the cooperative overpaid the members for the products delivered during the reporting period. The deficit is also distributed to the members in proportion to their deliveries and is recorded as a debit entry in the accounts of each member, to be covered from next year sales or special funds maintained by the cooperative. The same considerations exactly apply to the relations between members and a supply cooperative, which purchases inputs (fertilizers, seeds, feed, etc.) from suppliers at wholesale prices and re-sells them to members. Members initially pay an advance to the cooperative to cover the estimated cost of the inputs (first-wave payments). If the financial report at the end of the period shows positive “surplus” (accounting profit), this means that the cooperative initially overcharged the members for the inputs and the “surplus” is distributed to the members in proportion to their purchases through the cooperative. This effectively lowers the end price that members pay to the cooperative for inputs. If the financial report shows a “deficit” (accounting loss), this means that the cooperative initially undercharged the members for their purchases and the “deficit” is also allocated to members in proportion to their purchases. A similar scheme is applied in other service cooperatives, including cooperatives that provide machinery services to members using a jointly owned pool of farm machines. Taxation of Cooperatives Cooperatives have the potential to increase the benefits to members by exercising their market power and negotiating better prices and improved terms both for sale of member products and for delivery of services. Yet tax distortions may negate these positive effects and make membership in a cooperative an ineffective proposition for farmers. Tax issues must be carefully addressed and resolved if cooperatives are to have any chance of developing in Tajikistan. Farmers join cooperatives with the objective of getting higher prices for their products and paying lower prices for the inputs and services they buy. The cooperative model achieves these objectives in two ways. First, a cooperative represents many farmers in the market and thus enjoys greater market power than 133 Agricultural Cooperatives in Transition Countries each small farmer individually. The cooperative can negotiate lower prices for wholesale bulk purchases of inputs and pressure traders into paying higher prices for guaranteed deliveries of high-quality products. Second, the cooperative does not aim to maximize its profits: in fact, it distributes all its profits to members in proportion to their participation in cooperative activities, thus increasing members’ revenues and reducing their costs compared to what they could achieve by dealing with private profit-maximizing intermediaries. These two mechanisms usually guarantee that cooperative members fare better than smallholder farmers selling and buying independently. In principle this provides an incentive for joining a cooperative, but there is a danger that taxation of cooperatives may negate the membership benefits and discourage farmers from becoming members. Today, household plots practically do not pay any tax on the sale of their farm products, whereas dehkan farms pay the unified tax (based on the area of land they control) and sometimes also the local retail sales tax. Everybody has to pay the social tax, but this is not related to the farming activity and is not relevant for the present discussion. When household plots and dehkan farms purchase inputs or farm services, the prices they pay include VAT, but their tax status is such that they cannot offset these VAT payments against their sales (smallholder farmers usually do not charge VAT on sales). A cooperative, on the other hand, is a legal body subject to different taxation rules. Specifically, three types of taxes may negatively affect the benefits that members receive from their cooperative: N VAT on transactions between the cooperative and its members N Tax on accounting profits reported by the cooperative N Retail sales tax Exemption from Value Added Tax Like dehkan farms themselves, the cooperative pays VAT to suppliers, but then the cooperative has to charge VAT on its sales to members. As a result, members may end up paying to the cooperative more than what they would have paid independently to a supplier. The negative effects of VAT on the relations between cooperatives and their members have been identified and discussed in detail by the Working Group on the Law of Cooperatives and the Working Group on Tax Reform. It has been agreed that all transactions with members – supply, provision of services, contract work – should be exempt from VAT. An appropriate amendment has to be added to the Tax Code in Art. 211, para. 2, dealing with VAT exemptions to non-commercial organizations. Further to our previous discussion of the classification of cooperatives, we should stress that, for the exemption to apply to all cooperatives, this approach in effect requires 134 8. Cooperative Development in Tajikistan recognizing all cooperatives (with minor exceptions) as non-commercial organizations. The recommended approach to VAT exemption of cooperative transactions with members is an excellent example of the principle of “fiscal transparency” applied to cooperatives in the Netherlands. In this country, with its outstanding tradition of cooperation in agriculture and other sectors, transactions between members and their cooperative are exempt from all taxes, not only VAT. This gives recognition to the “not-for-profit” status of cooperatives and makes the entire surplus available for distribution to members, without subjecting it to taxes on profit. Exemption of Distributions to Members from Tax Cooperatives do not know in advance how much to pay to members for product deliveries and how much to charge for input supplies and other services. Financial settlements with members are handled in two ways: the first-wave payments and charges are in the nature of an initial advance, and the final settlement is made at the end of the period, when the financial statements have been prepared. As a result, a cooperative usually presents a financial statement that shows a positive surplus (accounting profit) or a deficit (accounting loss) according to the following scheme: Marketing cooperative Revenues from sale of members’ products Costs: First-wave payments to members Operating costs Gross income (surplus/deficit) Supply cooperative Revenues: first-wave payments from members Costs: Paid to suppliers Operating costs Gross income (surplus/deficit) Gross income (^hoh^ is the Russian term used in the draft law of cooperatives) represents the surplus or deficit that is further allocated by three channels: 1) Allocation to the cooperative reserve fund or other capital funds (“retention of earnings” in standard accounting terminology). 2) Distribution to members in proportion to their share contribution to the cooperative capital (“dividends” in standard Western terminology; iZ_\u_ \uieZlu in the draft law of cooperatives). 3) Patronage refunds (dhhi_jZlb\gu_ \uieZlu) in proportion to their use of cooperative services (i.e., basically in proportion to first-wave payments to the members). 135 Agricultural Cooperatives in Transition Countries The sum of the three amounts distributed to members is equal to gross income. The draft law of cooperatives suggests specific formulas and ceilings for the calculations of the first two allocations (allocation to reserve and other funds; share-based distributions). Therefore, these allocations should be calculated first and the amount available for distribution as patronage refunds then determined as the difference between gross income and the first two allocations: Gross income: Less allocation to reserve fund and other funds Less distribution in proportion to share contribution (iZ_\u_ \uieZlu) Difference available for distribution as patronage refunds (dhhi_jZlb\gu_ \uieZlu) This is the logical sequence of calculations suggested by the relevant allocation procedures in the draft law of cooperatives, although it does not quite fit the accepted logic of Western accounting. Conventional interpretation of the tax code will require the cooperative to pay tax on the full gross income at applicable rates. Recognition of the special nature of patronage refunds in cooperatives (as second-wave adjustment of initial overor under-payment to members) and the Dutch principle of “fiscal transparency” suggest that this component of gross income should not be taxable. Furthermore, the U.S. tax code recognizes “dividends” paid to members in agricultural cooperatives (but not other cooperatives) as non-taxable at the cooperative level (i.e., exempt from withholding taxes). If the Dutch and the U.S. tax principles are adopted, the cooperative will be required to pay tax only on the share of gross income retained in reserve fund and other capital funds. The amount retained in the reserve fund and other capital funds will be shown net after deduction of the appropriate taxes. Recognizing the need to exempt patronage refunds (dhhi_jZlb\gu_ \uieZlu) from taxation, the draft Law of Cooperatives introduced an important provision in Art. 39(3): Payments to cooperative members in accordance with their participation in cooperative activities and payment of bonuses/honoraria to cooperative managers are treated as expenses. <uieZluqe_gZfdhhi_jZlb\Z\khhl\_lkl\bb kbomqZklb_f\ohayckl\_gghc^_yl_evghklb dhhi_jZlb\Zb\uieZlu\hagZ]jZ`^_gbc ^he`ghklgufebpZfdhhi_jZlb\Zhlghkylky djZkoh^Zfdhhi_jZlb\Z This, in addition to the proposed VAT amendment, is a very important step toward establishing “fiscal transparency” for cooperatives in Tajikistan. To be effective, however, this provision must be incorporated as an amendment in the new Tax Code currently debated: expert opinions suggest that tax authorities 136 8. Cooperative Development in Tajikistan refuse to follow provisions incorporated in specific laws unless they are also reflected in the Tax Code and the courts are reluctant to rule against the tax authorities in such instances. We furthermore recommend following the U.S. practice and exempt share payments (iZ_\u_ \uieZlu) from taxation in agricultural service cooperatives. Exemption from Retail Sales Tax The last taxation issue to consider concerns the retail sales tax. Again, household plots are exempt from this tax by definition, whereas dehkan farms, although legally liable, usually manage to avoid retail sales tax on their direct sales to consumers in the market. Avoidance is of course impossible when dehkan farms (or perhaps even household plots) sell to legal bodies, such as processors or, in the future, marketing cooperatives. In principles, sales to a processor or a marketing cooperative are not retail sales: these are wholesale transactions and should be exempt from the retail sales tax. We are told, however, that tax authorities enforce collection of retail sales tax also on wholesale transactions with processors. This issue must be resolved, as payment of retail sales tax on transactions with marketing cooperatives will place cooperative members (whether dehkan farms or household plots) at a distinct disadvantage compared to non-members. It will also be necessary to exempt cooperatives from any retail sales tax on inputs delivered to members: this will have to be resolved in the spirit of “fiscal transparency” as in the VAT exemption amendment. Promoting cooperatives In Tajikistan, as in all CIS countries, the notion of cooperative automatically raises the connotation of a “production cooperative” or the collective farm that enjoyed such unfavorable reputation during the Soviet era. The agricultural reform strategy aims at establishing a different type of cooperatives – service cooperatives, whose function is to provide farm services without in any way depriving farmers of independence in all production activities. The implementation of the strategy to encourage the development of service cooperatives should therefore start with a broad information campaign in rural areas, intended to explain the new notion of a cooperative and to elaborate on the advantages of becoming a member. This information campaign is basically the responsibility of the government, but donors should naturally be invited to utilize their experience with the establishment of cooperatives and help with funding. Several donor organizations work actively on the establishment of agricultural service cooperatives in Tajikistan. These include Acted, OSCE, GIZ/TAFF, and 137 Agricultural Cooperatives in Transition Countries the Aga Khan Foundation. Unfortunately, donor experiences and monitoring efforts have not been documented (with the possible exception of the GIZ/TAFF TAG groups) and it is very difficult to analyze the actual achievements of these efforts so far. It is even impossible to map the existing donor-established cooperatives across Tajikistan to get a sense of spread and coverage. Visits to a number of cooperatives in Khatlon, Sughd, and Rasht have shown that these cooperatives are mainly fledgling efforts which are badly in need of training and guidance. The general feeling is that cooperatives, once launched with donor assistance, are left pretty much on their own, without followup assistance, monitoring, and guidance. Cooperative managers naturally complain of difficulties with purchasing machinery or raising credit, but beyond that it is clear that they are untrained and without experiencing in managing a service cooperative. All cooperatives have formal business plans, but managers need training and guidance on how to implement the plans and how to work toward achieving their strategic objectives. Training and learning programs are needed for existing and potential cooperative managers (and also members). Beyond initial training and learning, it is necessary to establish permanent information services for members and managers. These information services should focus on the following areas: (1) market information; (2) relations with banks;(3) taxation; and (4) legal issues. The USDA Cooperative Service in the U.S. and similar cooperative services in the Netherlands are good models for the establishment of a permanent cooperative service in Tajikistan. As part of information and training services, it is necessary to establish mechanisms for systematic experience sharing among existing cooperatives. A successful cooperative is an excellent example that should be followed by other existing or potential cooperatives – but this example should be advertised through experience sharing among others. The feeling from our field visits is that today the existing cooperatives operate pretty much on their own, without joining their forces with neighboring cooperatives (as is inherent in all cooperative systems in the world). One example is a dried-apricot marketing cooperative, which had to refuse a large export order because it did not have enough capacity to deliver the required volume. Curiously, the cooperative manager did not think it feasible to connect with one or two neighboring cooperatives to make up the missing volume. Experience-sharing efforts should also emphasize the advantages of joining forces among cooperatives. In addition to information support and human-capital development, fledgling cooperatives may require assistance with physical capital, including machinery, equipment, and access to credit. Programs should be put in place to provide seed 138 8. Cooperative Development in Tajikistan money for the establishment of new cooperatives. In this context the Acted model appears particularly promising: cooperatives paid from their own funds about one-third of the value of equipment provided by Acted, and the remaining twothird were a grant from the donor. Credit facilities should be established to help cooperatives finance their investment and working capital needs at reasonable rates. Access to these facilities should be linked to the cooperative’s ability to generate its own matching funds (as with the requirement of contributing a share of machinery costs). All these efforts may require cooperation between the government and the donors. In conclusion, we should stress that although service cooperatives and private service providers are definitely spreading in Tajikistan, the coverage so far is very sparse. Machinery cooperative or a private machinery service provider may exist in one or two jamoats – with absolutely nothing in any of the other jamoats in the raion. Tajikistan needs a much denser network of service providers – cooperative or private – for its farmers and rural population. A distinct advantage of cooperatives is that they are naturally adapted to scaling up to a multi-level hierarchy: small, easily established, low-investment jamoat-level cooperatives can form larger, more capital-intensive second-level cooperatives that will scale up the first-level services to a cluster of jamoats or the whole raion. Take the example of a dairy cooperative system: first-level cooperatives in jamoats simple need a refrigerated tank for milk collection from households and farms; the second-level cooperative will have to invest a refrigerated tanker for collecting milk from the jamoat-level cooperatives and transporting it to the central processing facility. In this way, the investment costs are spread over the two-level system, without unduly overburdening any of the cooperatives. 139 9. Cooperatives in Kyrgyzstan: Findings from a Survey of Cooperatives and Users Zvi Lerman and David Sedik (2012-2014) Individualization of agriculture manifested in a sweeping shift from largescale collective farms to small family farms is the most striking change that the transition has produced in agricultural sector of all former Soviet republics, Kyrgyzstan included (Lerman 2008; Lerman and Sedik 2009). Small farms everywhere in the world face essential constraints in their access to market services (Abele and Frohberg 2003), and Kyrgyzstan is not an exception in this regard. The main difficulties faced by smallholders include difficulties with access to sales channels for farm products, difficulties with access to supply channels for farm inputs, difficulties with purchase of farm machinery and transportation equipment, and difficulties with access to agricultural extension and market information. Best-practice world experience suggests that farmers’ service cooperatives provide the most effective way of improving the access of small farmers to market services in areas where no private intermediaries operate or where private intermediaries unfairly exploit farmers through monopolistic practices (Cobia 1989). Such cooperatives can cover the whole field-to-market value chain, including joint purchase of farm inputs, attention to water distribution and irrigation (through Water User Associations), organization of machinery pools for field work, establishment of sorting and packing facilities, transport of farm products to markets, processing, etc. They can also provide agricultural extension and market information services, as well as veterinary and artificial insemination services, all of which are essential for productivity improvement in both crop and livestock production. Recognizing these positive roles of agricultural service cooperatives for the rural population, the agricultural development strategies for Kyrgyzstan emphasize the development of service cooperatives as one of the priorities (Kyrgyzstan Strategy 2012). 140 9. Cooperatives in Kyrgyzstan: A Survey of Cooperatives and Users There is significant disparity in the level of development of service cooperatives between the formerly socialist countries – members in the Commonwealth of Independent States (CIS) and established market economies (see Chapter 6). A survey of agricultural cooperatives (FAO survey 2012) was conducted in Kyrgyzstan – one of the CIS countries – in an attempt to describe the functioning of these emergent organizational forms and explain, as far as possible, the reasons for the sluggish development of agricultural cooperation in this country. Western Classification of Cooperatives International Cooperative Alliance (ICA) defines a cooperative as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise (ICA 2013). These principles are fully acknowledged in Kyrgyzstan’s law of cooperatives (Law 2005). A cooperative is a business-oriented legal entity and in a certain sense it is an analogue of a shareholder corporation. However, business corporations aim to maximize their profit, whereas cooperatives aim to maximize the benefits that members derive from their participation in cooperative activities, including lower prices paid for inputs and services and higher prices received for products (for a systematic comparison of the attributes of cooperative and shareholder corporation see Chapter 7). The Western cooperative paradigm distinguishes between production cooperatives and service cooperatives. Production cooperatives are cooperatives in which members are jointly engaged in the production process. In agricultural production cooperatives, members jointly cultivate cooperatively held agricultural resources, such as land or farm machinery, producing a variety of farm products. Collective farms in the former Soviet Union and kibbutzim in Israel are examples of agricultural production cooperatives. Members of production cooperatives do not engage in independent farming on their land, with the possible exception of production on the family’s household plot. Production cooperatives sell their output to outsiders; yet the main function of production cooperatives is to improve the wellbeing of their members by creating conditions for more efficient farming than what would otherwise be feasible in individual farms. Decision makers in CIS countries often argue that, by pooling members’ fragmented smallholdings into large farms, production cooperatives exploit economies of scale and achieve higher efficiency. Yet economies of scale generally do not exist in primary agriculture (Binswanger et al. 1995) and 141 Agricultural Cooperatives in Transition Countries agricultural production cooperatives are less efficient than individual and family farms due to agency costs and free-riding effects (Allen and Lueck 2002). As a result, production cooperatives in the world are a tiny minority among producers. According to ICA data, production cooperatives account for less than 5% of all cooperatives in the world. Service cooperatives, on the other hand, are the largest and most typical category of cooperatives in developed and developing countries: these are cooperatives that provide services to their members-producers, who continue to carry out all production activities independently on their own land. In contrast to the minor role of production cooperatives in market economies, service cooperatives in many countries account for a large share of transactions in the relevant economic sector. For instance, agricultural marketing, processing, and supply cooperatives are major players in markets for farm products and farm inputs in North America, Western Europe, Japan, and South-East Asia. In the U.S., agricultural cooperatives handle about 30% of farmers’ total farm marketing volume and 28% of farmers’ total supply purchases (Mather et al., 2004). In the European Union, the share of agricultural cooperatives is even larger: in countries such as the Netherlands, Denmark, Ireland, and Sweden 70%-80% of farm products are marketed through cooperatives and cooperatives account for 50%70% of all farm input purchases (Van Bekkum and Van Dijk, 1997). Service cooperatives may employ some of their members as workers, but most employees (and even most managers) are hired outsiders. Service cooperatives use members’ share contributions to capital as well as borrowed funds to finance purchase of goods and services from various market sources and then resell these services to members at advantageous prices. Agricultural service cooperatives are usually subdivided into marketing cooperatives, processing cooperatives, input supply cooperatives, and farm machinery cooperatives. Because of the prevalence of agricultural service cooperatives in the West, the term “cooperative” in market economies is automatically interpreted as a service cooperative. On the other hand, in Kyrgyzstan, as in all CIS countries, the term “cooperative” is automatically understood as a production cooperative – the model of a former kolkhoz or collective farm (Plunkett Foundation 1995). Although the 2005 Kyrgyzstan Law of Cooperatives attempts to characterize the differences between production and service cooperatives (Law 2005), there is much confusion among the rural population and even among policy makers about the actual nature of the two types of cooperatives: the Soviet-style production cooperative to which rural people had been exposed for decades and the Westernstyle service cooperative advocated by international experts. 142 9. Cooperatives in Kyrgyzstan: A Survey of Cooperatives and Users Data Sources on Agricultural Cooperatives in Kyrgyzstan Some statistics on cooperatives in Kyrgyzstan have been available from two sources: a special unit dealing with cooperative development in the Ministry of Agricultural (largely without proper budgets or strategic guidance since 2008) and National Statistics Committee (NSC) in Bishkek. MinAg reports the number of registered cooperatives, which showed impressive growth over time, rising from about 300 in 2004 to 1,300 in 2009 (Figure 9.1). 16 NSC, on the other hand, based its reporting on the number of active (operating) cooperatives. The gap between the two sources is dramatic (Figure 9.1): in 2011, MinAg reported more than 1,400 registered cooperatives, while according to NSC there were just 400 active cooperatives in the country (Kyrgyzstan in Numbers 2012). It thus became apparent that more than 70% of registered cooperatives in Kyrgyzstan were inactive and existed only on paper, presumably with the intent of taking advantage of future credit or taxation benefits that might materialize through government policies (Beyshenaly and Namazova 2012). Figure 9.1. Development of cooperatives in Kyrgyzstan 20042011. Blue bars: registered cooperatives from MinAg; red bar: active cooperatives from National Statistics Committee (Kyrgyzstan in Numbers 2012). The dominant majority of registered cooperatives in MinAg statistics are production cooperatives, not service cooperatives. In 2009, 88% of the registered cooperatives were classified as production cooperatives and only 12% were service and processing cooperatives. Unfortunately, the existing statistics are limited to the number of cooperatives: there are no data on land endowments, sales volumes, or the size of membership. Special surveys have to be conducted to elicit any functional information. 16 These numbers do not include credit unions, created mainly by the Raiffeisen Foundation in Kyrgyzstan (some 300 in 2009). 143 Agricultural Cooperatives in Transition Countries One such survey of cooperatives in Kyrgyzstan was conducted in 2012 by a local NGO with FAO funding (FAO/REU survey 2012). The sample frame for the survey consisted of the 400 active cooperatives in the NSC database. The original objective was to survey a sample of 100 cooperatives from the NSC list, collecting information mainly on service cooperatives, with control information on some production cooperatives. This objective could not be achieved, however, because virtually no pure service cooperatives were found in the NSC database. Among 400 active cooperatives in the NSC list, only 17 were identified as mixed service/production cooperatives and three as trade/service cooperatives (these were apparently closest to pure service cooperatives). All these 20 serviceoriented cooperatives were included in the survey sample, which additionally included 37 entities identified as agricultural production cooperatives for a total sample of 57 respondents. Given the composition of the NSC list, the cooperative sample after the fact was neither random nor proportional. In addition to cooperatives, the survey also covered 1,000 peasant farmers randomly selected across the country, in proportion to the total number of peasant farms in each oblast. These respondents provided insights on the relations between users and cooperatives. The sample structure is presented in Table 9.1. Different survey instruments were developed for cooperatives and for peasant farms. The questionnaire for cooperatives was administered to cooperative managers, whereas in peasant farms the head of farm, the spouse, or the eldest son were interviewed. Table 9.1. Sample of cooperatives and peasant farms in the 2012 FAO/REU survey in Kyrgyzstan Cooperatives N % of sample Chui 15 26.3 Batken --Issyk-Kul’ 15 26.3 Jalal-Abad 6 10.5 Naryn --Osh 15 26.3 Talas 6 10.5 Total 57 100.0 Source: FAO/REU survey (2012). Oblast N 180 18 89 285 101 247 80 1000 Peasant farms % of sample 18.0 1.8 8.9 28.5 10.1 24.7 8.0 100.0 Functional Typology of Cooperatives Surveyed Judging by their asset base and activity profile, 52 of the 57 cooperatives surveyed were in fact production cooperatives. They all reported that they cultivated some agricultural land – a clear distinguishing characteristic of a 144 9. Cooperatives in Kyrgyzstan: A Survey of Cooperatives and Users production cooperative. The land in cooperatives was typically contributed by the members, who were the source for 57% of total agricultural land in the sample; another 27% of land in cooperatives was leased from the municipality or the state. Virtually all cooperatives (51 out of 57) reported that they engaged in agricultural production – predominantly crops, with mixed crop-livestock farming in 11 of the 51 cooperatives. In other words, practically all the cooperatives painstakingly selected from official registers are actually production cooperatives, with not more than 6 out of 57 cooperatives in the sample possibly qualifying as service cooperatives (these are the six without primary production activities). Service Activities of the Cooperatives In addition to primary production, all cooperatives reported providing services to both members and non-members. A production cooperative, in addition to providing services to the joint production process where members work, also supplies inputs to individual production in members’ private household plots and sells some of its surplus inputs to non-members (for a higher price). Provision of services to members and non-members is thus a typical feature of production cooperatives and does not necessarily identify the cooperative as a service cooperative. Table 9.2. Services provided by cooperatives in the sample (percent of respondents, n=57) Category of service Sales of farm products Storage Packing Processing Fertilizer application Machinery services Transportation Soil melioration Information Veterinary Marketing services Purchased inputs Advisory Construction Average Source: FAO/REU survey (2012). For members 70 74 52 56 67 65 58 42 35 30 26 26 21 19 46 For non-members 19 23 21 18 12 28 33 21 19 9 12 5 11 5 17 Table 9.2 shows the percent of cooperatives in the sample that provide various services to their members and non-members. The frequency of services to members is substantially higher than the frequency of services to non-members (46% compared with 17% averaged over 14 service categories). The main 145 Agricultural Cooperatives in Transition Countries services provided by more than 50% of cooperatives to members include marketing of farm products (sales, storage, packing, and processing), fertilizer application, mechanical field services, and transportation. Mechanical field services and transportation are also the most common services provided to nonmembers, presumably because the local production cooperative is the main source of farm machinery and vehicles in rural areas. This, combined with the relatively high percentage of cooperatives providing access to storage facilities for nonmembers, is a clear illustration of the positive role that cooperatives play in overall rural development. Figure 9.2. Local service sufficiency increases with the percent of cooperatives that deliver the service. Source: FAO/REU survey (2012). A direct indication of the positive role of cooperatives in rural life is provided by the results shown in Figure 9.2. Here each dot represents one of 15 different services, such as storage of farm products, machinery services, input purchases, product sales, and so on. For each of these services the cooperative managers were asked if their cooperative supplied the particular service and to what extent the local demand for the service was satisfied in their opinion (fully satisfied, partially satisfied, not satisfied). The vertical axis in Figure 9.2 plots the percentage of cases when the demand for each service was fully satisfied; the horizontal axis is the percentage of cases when the service was delivered by the coop. There is a clear positive correlation between the frequency of cases when the local demand for the service was fully satisfied and the frequency of cases when the particular service was delivered by the coop. Service sufficiency thus clearly improves when cooperatives step in as service providers. Taxation and Financial Performance of Cooperatives Two-thirds of cooperatives surveyed pay taxes, with land tax figuring as the main tax (67% of respondents). The next in importance is the obligatory social tax proportional to salaries paid, which is reported by 40% of the cooperatives. 146 9. Cooperatives in Kyrgyzstan: A Survey of Cooperatives and Users Profit tax and VAT are reported by very few cooperatives (17% and 2%, respectively). This can be regarded as evidence that tax authorities generally respect the tax code provisions explicitly exempting cooperatives from these taxes. Taxes do not appear to be a major burden for cooperatives, as less than 10% listed reduction of taxes among the demands for support from the government. The main areas in which tax reductions were desired include purchase and leasing of farm machinery (18% of respondents), construction services (17%), and sales of farm products (16%). Fully 80% of cooperatives surveyed do not receive any support from the government and more than 40% state that they do not require any support. Between 10% and 15% of the cooperatives expect to receive government support in the form of subsidized prices, subsidized credit, and – importantly – training. All this can be interpreted as signs of satisfactory financial performance. Indeed, the majority of cooperatives (58%) report their financial situation as stable or profitable and only the remaining 42% are loss-making. Farmers’ Attitudes Toward Cooperation Cooperation is expected to alleviate the difficulties that farmers face in their farm operations, and farmers’ perception of difficulties therefore provides an indication of the need for cooperation. Most farmers reported that they faced difficulties due to shortage of inputs (fuel, fertilizer, chemicals, seeds) and inadequate access to farm machinery, including lack of machinery leasing options (Figure 3). Other difficulties, notably difficulties with product sales, access to financial sources, and veterinary services, were highlighted with lower frequency, but still by more than 20% of respondents among the farmers surveyed. Difficulties that are routinely mentioned in various reports, such as high taxes, lack of agricultural experience, shortage of labor, and insufficient land, were reported by 10%-15% of farmers surveyed and can be regarded as relatively minor. The pressing difficulties – those reported by more than 20% of respondents in Figure 3 – are precisely the problem areas that cooperatives are designed to overcome. Two areas of pressing difficulties in Figure 9.3 deserve special mention. Water shortages (reported by 40% of respondents) are an endemic problem in Kyrgyzstan. The creation of Water User Associations was expected to alleviate these difficulties, and although almost half the respondents are members in these associations, this form of cooperation according to the survey has so far failed to produce a significant effect on water shortages (30%-40% complain of water shortages among both WAU members and non-members). Lack of state support 147 Agricultural Cooperatives in Transition Countries is a general macro-economic problem not necessarily within the competence of cooperatives, but an association of farmers clearly has more lobbying power in this respect than each individual farmer separately. Cooperatives may be in a better position to secure state support for their members than individuals for themselves. Figure 9.3. Most pressing difficulties faced by farmers in their operations (n=1000). Source: FAO/REU survey (2012). Informal cooperation is quite widespread among farmers in Kyrgyzstan. Fully 22% of farmers surveyed participate informally in some joint activity with other nearby farmers (Figure 9.4). Joint use of farm machinery and transport facilities is the most common, reported by 17% and 14% of respondents respectively. There is obviously an acute need for these services that cannot be met by individual means, as cooperatives also report provision of mechanical services and transport with high frequency to both members and non-members (see Table 9.2). Joint sales of farm products, joint purchase of inputs, and joint processing are also reported, although with lower frequency of between 5% and 10% of respondents. Figure 9.4. Informal cooperation in various activities among family farms. Source: FAO/REU survey (2012). 148 9. Cooperatives in Kyrgyzstan: A Survey of Cooperatives and Users It is noteworthy that 10% of peasant farmers surveyed report informal cooperation in agricultural production outside a production cooperative. On the other hand, formal, organized cooperation is very limited among peasant farmers in Kyrgyzstan. Only 8% of the 1,000 farmers surveyed (78 respondents) are members of an agricultural cooperative and fully 50% do not belong to any association. Fully 46% are members in Water User Associations, which presumably have established themselves as an effective institution for water management – not without large-scale promotion campaigns by the government and the World Bank. Table 9.3. Participation of cooperative members in various services and activities (percent of respondents) Area of cooperation All coop members (n=78) Joint production 44 Machinery for field work 59 Product sales 54 Seed supply 55 Fertilizer/chemicals supply 54 Agricultural processing 33 Animal feed 37 Average satisfaction rating Source: FAO/REU survey (2012). Members who participate in joint production (n=34) 100 85 79 88 88 56 65 Members who do not participate in joint production (n=44) 0 39 34 30 27 16 16 Satisfaction rating among those using the activity 59 61 64 67 62 58 55 61 Among the small number of farmers who are members of a formal cooperative (78 respondents), over 50% enjoy four main services: farm machinery, sales of farm products, supply of fertilizers, and quality seeds (Table 9.3). Furthermore, 56% of these farmers produce independently, i.e., they receive services from their cooperative without engaging in joint agricultural production. The survey thus distinguishes between two groups of cooperative members among peasant farmers: 44% are in effect members of a production cooperative and receive services as such; 56% are in effect members of a service cooperative, or rather a service component of a production cooperative: they receive services from the cooperative while continuing to produce independently. These farmers represent the non-member contingent of service recipients shown in Table 9.2. Members in service cooperatives (i.e., those who do not participate in joint production) receive basically the same services as members in production cooperatives. However, the frequency of these services for farmers who are only members of the service cooperative (i.e., do not participate in joint production) is lower than the frequency for those who participate in joint production, although 149 Agricultural Cooperatives in Transition Countries the relative ranking is the same. In other words, farm machinery, sales of farm products, supply of fertilizers, and quality seeds are the most frequently enjoyed services for both groups of cooperative members. Cooperative members are generally satisfied with the services they receive from the cooperative: on average, over 60% of members who actually use the various services report that they are satisfied. Figure 9.5. Reasons for not becoming a cooperative member (n=922). Source: FAO/REU survey (2012). The substantial gap between the frequency of formal and informal cooperation (8% and 22% of farmers, respectively) clearly suggests that there is a large potential for development and adoption of service cooperatives in Kyrgyzstan. Why are farmers reluctant to join a cooperative? The main reason cited by the respondents is that there is no cooperative in the vicinity that they can join (55%; see Figure 9.5). The second most frequently cited reason is that the respondents wish to preserve their independence (42%). This probably reflects the ingrained influence of Soviet-style production cooperatives, which generally did not observe the basic principles of voluntary participation and democratic governance. Loss of independence does not apply to service cooperatives, and this reason is clearly a facet of the lack of clear understanding of the differences between service and production cooperatives. About 15% of respondents attribute their not joining a cooperative to insufficiency of information about cooperatives, which strongly suggests that cooperative development requires a large-scale information campaign to familiarize the rural population with the working of cooperatives. The universal issue of lack of trust in managers and other members is cited by more than 10% of respondents. Finally, the danger of increased taxation for cooperative members does not seem to be a problem: only 6% of respondents raise this issue, probably because farmers simply do not understand 150 9. Cooperatives in Kyrgyzstan: A Survey of Cooperatives and Users the taxation issues involved (see Chapters 6-7). This finding for potential members is consistent with the generally relaxed attitude of cooperative managers toward taxation (see above, Taxation and financial performance of cooperatives). Effect of Cooperation on Farmers’ Wellbeing Farmers’ wellbeing was explored in the survey through two qualitative questions. One question, probed the absolute perceived level of wellbeing by asking “how do you rate your family’s financial situation” and another question probed the relative perceived wellbeing by asking “how would you assess your family’s financial situation relative to other families in the village”. The respondents classified their absolute perceived wellbeing into five categories: 1 – family income is hardly sufficient to buy food, 2 – family income is sufficient for basic necessities 3 – family income is sufficient to buy also clothes and footwear 4 – the family can satisfy all its daily needs, but cannot purchase durables 5 – we do not experience any financial difficulties. For purposes of statistical analysis, the five categories were aggregated into two levels: categories 1, 2, 3 were jointly characterized as “basic level of wellbeing” and categories 4, 5 were grouped into “comfortable level of wellbeing”. Survey results indicate that cooperation – either informal or formal – has a strong positive effect on family wellbeing. Table 9.4 summarizes the findings. Among farmers who cooperate informally with other farmers, fully 68% perceive their wellbeing level as comfortable, compared with just 54% among those who do not cooperate with other farmers. Similarly, among farmers who participate in formal cooperation as members of an agricultural cooperative, 74% perceive their wellbeing level as comfortable, compared with just 55% for those who are not cooperative members. In both cases, the difference is statistically significant by the chi-square test. When formal cooperation is further broken down into membership in a production cooperative (engaging in joint production) and membership in a service cooperative (receiving services without participation in joint production), members in production cooperatives appear to have a slight edge in perceived wellbeing compared to members in service cooperatives (Table 9.4), but the difference is not statistically significant. 151 Agricultural Cooperatives in Transition Countries Table 9.4. The effect of cooperation (informal and formal) on absolute perceived wellbeing Formal cooperation Member in Coop Member in production member service coop (n=77) coop (n=33) (n=44) Basic 46* 32* 45^ 26^ 18 32 Comfortable 54* 68* 55^ 74^ 82 68 Total 100 100 100 100 100 100 *, ^ – differences between categories statistically significant by chi-square test (p = 0.10). Wellbeing level Informal cooperation No informal Informal cooperation cooperation (n=195) (n=758) Not coop member (n=876) The question that probed the relative wellbeing level by asking “how would you assess your family’s financial situation relative to other families in the village” received the following answers: 1 – better than the rest, 2 – worse than the rest, 3 – same as the rest Here again cooperation has a strong positive effect on relative wellbeing, but this is observed only for formal cooperation through membership in a cooperative, and no such effect is observed for informal cooperation. Furthermore, the advantage of membership in production cooperatives compared to service cooperatives is expressed more strongly than in the previous case, and the difference between relative wellbeing of members in production cooperatives and service cooperatives is now statistically significant. The findings are summarized in Table 9.5. Table 9.5. The effect of cooperation (informal and formal) on absolute perceived wellbeing Relative wellbeing Informal cooperation No informal Informal cooperation cooperation (n=766) (n=196) Not cooperative member (n=888) Formal cooperation Member in Cooperative member production (n=74) cooperative (n=31) Member in service cooperative (n=43) 28^ Better than the rest 22 21 20* 36* Same as the rest 65 65 66* 54* 48^ 52^ Worse than 13 15 14* 9* the rest Total 100 100 100 100 100 *, ^ – differences between categories statistically significant by chi-square test (p = 0.10). 152 72^ 100 9. Cooperatives in Kyrgyzstan: A Survey of Cooperatives and Users Conclusions Most registered agricultural cooperatives in Kyrgyzstan appear to be production cooperatives – successors of former collective farms. They mainly engage in primary production on collectively held land, and provide services to non-members merely as a byproduct of their joint production activities. The rural population is not clear on the fundamental differences between production and service cooperatives and the benefits that can be derived from membership in a proper service cooperative. Government strategy documents do not distinguish with sufficient clarity between the two types of cooperatives, which only exacerbates the confusion. This situation suggests the need for a broad public awareness campaign to familiarize the rural population with the working and benefits of service cooperatives, thus encouraging bottom-up development of service cooperatives. Cooperatives in Kyrgyzstan are few in number and widely scattered. More than half the respondents in the sample of peasant farmers in the FAO/REU 2012 survey report that there is no cooperative in the vicinity that they can join. Other reasons for not joining a cooperative, e.g., fear of losing independence and lack of information about cooperatives, manifest lack of clear understanding of the differences between service and production cooperatives. Formal cooperation as manifested in membership in cooperatives is very limited among the farmers surveyed. Informal cooperation is much more widespread, and the substantial gap between the frequency of formal and informal cooperation (8% and 22% of farmers surveyed, respectively) clearly suggests that there is a large potential for development and adoption of service cooperatives in Kyrgyzstan. Furthermore, most farmers reported that they faced difficulties due to shortage of inputs (fuel, fertilizer, chemicals, seeds) and inadequate access to farm machinery, including lack of machinery leasing options. Other difficulties, notably difficulties with product sales, access to financial sources, and veterinary services, were highlighted with lower frequency, but still by more than 20% of respondents. These pressing difficulties reported by more than 20% of respondents are precisely the problem areas that cooperatives are designed to overcome. Difficulties that are routinely mentioned in various reports, such as high taxes, lack of agricultural experience, shortage of labor, and insufficient land were reported by 10%-15% of respondents and can be regarded as relatively minor. Taxes are not perceived as a major issue by either cooperative managers or farmers. Tax code provisions exempting cooperatives from profit tax and VAT are generally respected. 153 Agricultural Cooperatives in Transition Countries Government support plays a minor role in agriculture: most cooperative managers and farmers surveyed report that they do not receive any support. This, however, has not led to a major outcry with demands for more government support in the survey. This probably suggests that information and training are more important than direct financial support for cooperative development. The survey clearly shows that cooperatives play a positive role in rural life. Thus, sufficiency of services in any given area improves when cooperatives step in to provide the services and farmers’ perceived wellbeing is higher for cooperative members than for outsiders. References Abele, S. and Frohberg, K., eds. (2003). Subsistence Agriculture in Central and Eastern Europe: How to Break the Vicious Circle, Studies on the Agricultural and Food Sector in Central and Eastern Europe, Vol. 22, IAMO, Halle. Allen, D. and Lueck, D. (2002). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture, MIT Press, Cambridge, MA. Beyshenaly, N. and Namazova, B. (2012). Development of Agricultural Cooperatives in the Kyrgyz Republic [in Russian], IAIR – Institute for Analysis and Development Initiatives, Bishkek. Binswanger, H., Deininger, K., and Feder, G. (1995). “Power, Distortion, Revolt and Reform in Agricultural Land Relations,” in: J. Behrman and T. N. Srinivasan, eds., Handbook of Development Economics, vol. III, chapter 42, 2659-2772, Elsevier Science. Cobia, D., ed. (1989). Cooperatives in Agriculture, Prentice Hall, Englewood Cliffs, NJ. FAO/REU survey (2012). Survey of registered cooperatives and peasant farms across Kyrgyzstan, implemented by El-Pikir, Bishkek. ICA (2013). “Co-operative identity, values & principles,” International Cooperative Alliance. http://ica.coop/en/what-co-op/co-operative-identityvalues-principles Kyrgyzstan Strategy (2012). Agro-Business Development Strategy for Kyrgyzstan 2013-2020 [in Russian], Ministry of Agriculture and Melioration of the Republic of Kyrgyzstan, prepared with FAO Technical Assistance, Bishkek. Kyrgyzstan in Numbers (2012). Kyrgyzstan v Tsifrakh 2007-2001 [Russian], National Statistics Committee, Bishkek. Kyrgyzstan Strategy (2012). Agro-Business Development Strategy for Kyrgyzstan 2013-2020 [in Russian], Ministry of Agriculture and Melioration of the Republic of Kyrgyzstan, prepared with FAO Technical Assistance, Bishkek. 154 9. Cooperatives in Kyrgyzstan: A Survey of Cooperatives and Users Law (2005). Law of the Kyrgyz Republic on Cooperatives, No. 37, Bishkek. Lerman, Z. (2008). “Agricultural Recovery in the Former Soviet Union: An Overview of 15 Years of Land Reform and Farm Restructuring,” PostCommunist Economies, Vol. 20, No. 4, pp. 391-412. Lerman, Z. and Sedik, D. (2009). “Agricultural Recovery and Individual Land Tenure: Lessons from Central Asia,” FAO/REU Policy Study No. 2009-3. Mather, J.W., DeVille, K.C., Gessner, A.L., and Adams, C.C. (2004). Farm Marketing, Supply and Service Cooperative Historical Statistics, USDA, Cooperative Information Report 1, Washington, DC. Plunkett Foundation (1995). Review of 1994 Activities, Plunkett Foundation, Oxford, UK. Van Bekkum, O. and Van Dijk, G. (1997). Agricultural Co-operatives in the European Union, Van Gorcum, Assen. 155 10.Agricultural Cooperative Development in Kazakhstan and Ukraine David Sedik and Zvi Lerman (2013) The purpose of this chapter is to review the evidence on agricultural service cooperatives in two countries of the Commonwealth of Independent States (CIS)—Ukraine and Kazakhstan—and to consider the reasons for their lack of development compared to the countries of North America and Western Europe. Only one farm in 246 in Ukraine and one in 31 in Hungary are members of a service cooperative, while in the US and France each farmer is a member of a service cooperative and in Italy every other farmer is a member (Table 10.1). There are also far more farms per cooperative in Kazakhstan, Ukraine and Hungary, than in the countries of Western Europe and the US. Whereas there is only one cooperative for every 6,000 farms in Ukraine and Kazakhstan, and for every 10,000 farms in Hungary, in France there exists one service cooperative for every 178 farms. This statistic also indicates that the development of service cooperatives in Eastern Europe and the CIS is far behind that in the US and Western Europe. A number of reasons are often cited for the dearth of self-help organizations in ex-socialist countries (Akimbekova, 2010; Korinets, 2013; Tomich, 2013): 1) the agricultural policy environment may not encourage, and may even discourage, the formation of self-help groups such as service cooperatives; 2) joining a cooperative may increase the tax burden of farmers; 3) small farmers have limited startup capital, while working service cooperatives usually require substantial investment in order to justify themselves financially; 4) there are a limited number of leaders capable of professionally managing cooperatives in the countryside; 156 10. Agricultural Cooperative Development in Kazakhstan and Ukraine 5) there is a noticeable and understandable distrust in cooperation among the rural population (which is predominantly old) because of their previous experience with the socialist version of cooperation; 6) rural people have limited understanding of principles and direct benefits of cooperation, which is necessary for counteracting the attitude of distrust. Table 10.1. The Development of Agricultural Service Cooperatives in Selected Countries Country Ukraine Kazakhstan US France Hungary Italy Year 2010 2010 2010 2010 2007 2008 Number of agricultural service cooperatives 801 300 2,310 2,900 58 5,800 Number of cooperative members Number of farms 21,521 5,300,000 N.A. 1,850,000* 2,200,000 2,200,000 500,000 516,100 20,177 626,300 900,000 1,679,400 Ratio: Ratio: Farms per member Farms per cooperative 246 N.A. 1 1 31 2 6,617 6,167 952 178 10,798 290 Sources: US: USDA, 2012, USDA-NAS, 2013; Ukraine: Korinets, 2013: 36, 38, State Statistics Service of Ukraine, 2011: 10, State Statistics Service of Ukraine, 2012: 51; France: Eurostat, 2013, Filippi, 2012: 14; Hungary: Szabo, 2012: 23; Italy: Bono, 2012: 19; Kazakhstan: number of service cooperatives from Conception (2012), number of farms see next note. *The sum of peasant farms (170,000) plus an estimate of the number of household plots (1,680,000, assuming that each rural household has a household plot). Data for peasant farms from Agriculture in Kazakhstan 2007-2011 (Statistical Agency, Astana, 2012); data for rural households from 2009 Population Census of Kazakhstan: Households, vol. 1, p. 4 (Statistical Agency, Astana, 2011). Similar numbers emerge from the 2006-2007 Agricultural Census (Astana, 2008). In this chapter we show that there are potentially good economic reasons for farmers to cooperate in Kazakhstan and Ukraine. However, the need to cooperate is not enough. Support for the cooperative idea is low in the CIS countries based on past experience with the Soviet cooperative model, and due to the lack of information on and experience with alternatives.17 Overcoming the legacy of the 17 Academic researchers have investigated the issue of distrust in cooperation in post-socialist economies more formally. Gijselinckx and Bussels (2012) investigated two potential reasons for the lack of cooperation in the ex-socialist countries of Europe, finding high correlations between indicators of “social capital” and member intensity of agricultural cooperatives (percentage of farmers of a country that are cooperative members), but no discernible correlations between indicators of “general deeprooted cultural values” and member intensity. “Social capital” is defined as “the trinity of ‘networks, norms of reciprocity and trust’” (Gijselinckx and Bussels, 2012). Indicators of “general deep-rooted cultural values” were based on research by Hofstede, Hofstede and Minkov (2010). Lissowska (2013) came to similar conclusions in her analysis of social attitudes towards cooperation in European countries (based on the European Social Survey), where she found that the preference for cooperation in transition countries (Central and Eastern Europe, Russia and Ukraine) is close to that of the other (Western) European countries. However, transition countries differ in that people have less faith in the cooperative model based on their past experience with the socialist version of cooperation, which usurped and 157 Agricultural Cooperatives in Transition Countries past requires a “reimagining” of the cooperative model on the part of farmers and policymakers. Farmers need to experience the liberal-democratic model of cooperation, while policymakers need to recognize that the role of the state in organizing service cooperatives is minimal. Public policy should provide a supportive enabling environment for service cooperatives while simultaneously ensuring that both the government and farmers are aware of the change from “cooperation” imposed from above to the Western liberal model of self-help style, grass-roots cooperation. This has been a difficult task for CIS governments. To understand how governments in Ukraine and Kazakhstan have dealt with this task we consider two aspects of the enabling environment. First, we consider policies—what do state policies illustrate about the attitude of the government toward cooperatives in Ukraine and Kazakhstan? Second, we analyze legislation to gauge the extent of state support for agricultural service cooperatives and how it could be improved. The Need for Agricultural Service Cooperatives in Kazakhstan and Ukraine Agriculture in the CIS countries is based primarily on smallholders – peasant farms and household plots. The smallholder farm sector produced 70 percent of Gross Agricultural Output (GAO) in Kazakhstan and 55 percent in Ukraine in 2011 (Statistical Agency of Kazakhstan, 2012; State Statistical Service of Ukraine, 2012). Small farms everywhere in the world face constraints in their access to market services, and the CIS countries are not an exception in this regard. The main difficulties faced by smallholders include: difficulties with access to sales channels for market products, difficulties with access to supply channels for farm inputs, difficulties with purchase of farm machinery and transportation equipment, difficulties with access to information and advisory services, which are essential for raising productivity and efficiency, N limited access to credit resources, which are required to finance short-term working capital and long-term investment needs. N N N N These difficulties combine to create what is sometimes referred to as “the curse of smallness”, a trap that prevents smallholders from fully exploiting their distorted the liberal democratic model of cooperation that pervaded Europe (including Russia and Ukraine) before socialism. 158 10. Agricultural Cooperative Development in Kazakhstan and Ukraine inherent productivity advantages due to barriers in access to markets (Abele and Frohberg, 2003). In developed market economies private intermediaries often compete to buy and sell agricultural commodities from farmers, or farmers themselves market their own production. In the CIS countries such private rural intermediaries often act as monopsonistic buyers in the region they operate. In such cases in market economies farmers organize self-help bodies – so-called service cooperatives, whose function is to correct market failure by allowing alternative access to markets without relying on private service intermediaries. Such cooperatives can cover the whole field-to-market value chain, including joint purchase of farm inputs, attention to water distribution and irrigation (through Water User Associations), organization of machinery pools for field work, establishment of sorting and packing facilities, transport of farm products to markets, processing, etc. They can also provide agricultural extension and market information services, as well as veterinary and artificial insemination services, all of which are essential for productivity improvement in both crop and livestock production. What service cooperatives do not do is engage in primary agricultural production as a collective of farmers. In dealing with a service cooperative, the market effectively deals with a relatively large entity that combines many smallholders into a single negotiating position. Access difficulties imposed by smallness are thus automatically lifted. Service cooperatives overcome the “curse of smallness” by conducting market transactions for a large number of small farmers simultaneously. Ukraine and Kazakhstan Policies on Agricultural Service Cooperatives Ukraine The government of Ukraine has consistently declared support for agricultural service cooperatives over the past ten years, while implementation of this support has been far less consistent. More importantly, government programs, when they did provide support, focused on subsidies, rather than on making information for farmers widely available on the financial benefits of cooperatives and how to form them. Grass-roots education programs and publications on the benefits of cooperatives, including legal assistance for forming new cooperatives, has not been a major part of government policy in Ukraine. The main support of the government to agriculture has been the special agricultural VAT tax regime, which strongly skews the beneficiaries by distributing the largest share of 159 Agricultural Cooperatives in Transition Countries subsidies to a relatively small number of large producers rather than tens of thousands of smallholders. The Presidential Decree On Means for Development of the Cooperative Movement and Strengthening of its Role in the Market Reform of the Ukrainian Economy (President of Ukraine, 2000) foresaw the organization of a credit line, local budget resources for the development of service cooperatives and a fund for the support of service cooperatives in procuring bank loans, including loan guarantees. As of 2009 no funding for cooperatives was made available from the central government (Korinets, 2013:56). The Program for the Development of Agricultural Service Cooperatives for 2003-2004 (Ministry of Agrarian Policy, 2002) also promised support for cooperatives, though the means for this support would come from “domestic and foreign investors, share contributions of cooperative members and funds from local budgets. Ukrainian Law On the Main Pillars of State Agrarian Policy to 2015 (Parliament of Ukraine, 2005) noted that one of the main priorities of the state agrarian policy was “state support for the development of competitive agricultural production on the basis of cooperation and integration.” The State Special Program for the Development of the Ukrainian Village to 2015 (Ministry of Agrarian Policy and Food, 2007) also envisioned state support for agricultural service cooperatives with no apparent budget resources made available (Korinets, 2013:57). The first substantial funds made available from the central government for the development of agricultural service cooperatives were in accordance with the Cabinet of Ministers Decree no. 557 (3 June 2009), The State Special Economic Program for the Support of the Development of Agricultural Service Cooperatives to 2015 (Cabinet of Ministers of Ukraine, 2009). This decree planned for the creation of an additional 2,500 cooperatives through support for enabling legislation, funding infrastructure and removing obstacles for cooperative development. In fact, the program made funds available only for purchase of agricultural machinery for cooperatives (Korinets, 2013: 56). In 2011 the Ukrainian government again declared its support for agricultural cooperatives. In November 2011 President Yanukovich noted that “along with efforts to strengthen private farmers and large scale private producers, it is also necessary to do everything possible to develop the new cooperative movement in the countryside. They should become an important foundation of the structural reform of agriculture” (Korinets, 2013: 57). Support was continued into 2012 with the new version of the law On Agricultural Cooperation (Parliament of Ukraine, 1997), signed into law by the President on 19 January 2013. According to this legislation, 5 million UAH was to be made available for purchase of agricultural machinery by cooperatives. Finally, in February 2013 Minister of Agrarian Policy 160 10. Agricultural Cooperative Development in Kazakhstan and Ukraine Prisiazhniuk noted that “we are planning the development . . . of rural areas and the formation of a rural middle class. And the main mechanism we are proposing is agricultural cooperation, which will help increase the competitiveness of small producers and form the basis for the renaissance of the Ukrainian village” (RBKUkraine, 2013). Kazakhstan The latest official policy on cooperatives in Kazakhstan is concisely summarized in Kazakhstan-2050 (2012), the strategy for the development of Kazakhstan to 2050 presented by the President on the eve of Independence Day in December 2012: It is important to raise the overall level of business culture and to stimulate entrepreneurship… To this end we must encourage the attempts of small and medium business to establish associations and cooperatives and create an appropriate system of support and incentives for the entrepreneurs. A more detailed exposition of government policies for agricultural service cooperatives can be found in Conception (2012). This basic document outlines three main policy directions: N improvement of legislative base; N financial support (loans at subsidized interest rates, government subsidies for inputs and investments, tax breaks); N provision of information and training. Attempts to improve the legislative base continue, mainly through the efforts of the agricultural lobby (see, e.g., Draft amendment, 2010), but very little seems to be happening with provision of information about cooperatives and training for producers and potential managers. As in Ukraine, the main policy focus is on financial support, including credit and subsidies. Two models of government support are observed in Kazakhstan, both relying on state-controlled companies: N “Agricultural Credit Corporation”, established in 2001, is an arm of the Ministry of Agriculture that grants 5-7 year loans at 5% per annum as seed money for the creation of rural service cooperatives (not including Water User Associations); N “Social-Entrepreneurial Corporations” (Natsional’naya kompaniya “Sotsial’no-predprinimatel’skaya korporatsiya”) forming a regional 161 Agricultural Cooperatives in Transition Countries network of state–private partnerships entrusted – among other activities – with the establishment of service–procurement centers (servisnozagotovitel’nye tsentry – SZTs) that provide agricultural services to rural service cooperatives and agricultural producers; participation of service cooperatives in equity capital is a necessary condition for the creation of service–procurement centers. Up to April 2009, the Agricultural Credit Corporation had distributed 8 billion tenge (US$50-65 million depending on exchange rates) in subsidized agricultural loans (Conception, 2012; Akimbekov, 2010). It is argued that the availability of low interest-rate credits and other subsidies intended specifically for service cooperatives encourages the creation of “false cooperatives”, i.e., cooperatives that are established only for the purpose of gaining access to subsidized credits and inputs, without any regard for true cooperative principles. This trend may be responsible for the large discrepancies in cooperative statistics from different sources and for the large gaps between the number of registered and active cooperatives. As to service–procurement centers, in reality they duplicate the basic functions of service cooperatives without any attempt to adhere to cooperative principles. They appear to be a carry-over from the Soviet model of enlargement that characterized the agro-industrial complex, and their goal is apparently profit maximization, as is evident from the high prices that they charge for the services to cooperatives and farmers (Conception, 2012). Enabling Environment: Classification and Characteristics of Cooperatives The International Cooperative Alliance (ICA) defines a cooperative as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically-controlled enterprise (ICA, 2013). The persons who voluntarily unite to form a cooperative are usually referred to as members or member-owners, and one of the key attributes of membership is active participation in the activity of the cooperative (whether economic, business, or social). A cooperative is a legal entity and in a certain sense it is an analogue of a shareholder corporation. There are, however, some fundamental differences between a cooperative and a corporation, as listed in Table 10.2. Perhaps the main difference concerns the organization’s objective: while business corporations aim to maximize their profit, cooperatives aim to maximize the benefits that members derive from their participation in cooperative activities, 162 10. Agricultural Cooperative Development in Kazakhstan and Ukraine including lower prices paid for inputs and services and higher prices received for products (Cobia, 1989). Table 10.2. Comparative attributes of a cooperative and a shareholder corporation Attribute Owners Owners’ objective Organization’s objective Voting rights Income distribution rules Cooperative Members Use of services provided by the cooperative Maximize members’ benefits from working with the cooperative One member–one vote, regardless of share contribution Income distributed to members in proportion to their participation in the activity of the cooperative Corporation Shareholders–investors Earning income Maximize corporate profits Number of votes proportional to number of shares (i.e., share contribution) Income distributed to shareholders in proportion to the number of shares held The Western cooperative paradigm distinguishes between production cooperatives, service cooperatives, and consumer cooperatives based on their functional characteristics. Production cooperatives are cooperatives in which members are jointly engaged in the production process – irrespective of whether this is production of manufactured goods, agricultural commodities, or services. Production cooperatives are based on member labor and they sell their output to outsiders; yet the main function of production cooperatives is to improve the wellbeing of their members by providing jobs and working conditions that are superior to what would otherwise be available in the market. In agriculture it is often argued that, by allowing members to pool their fragmented smallholdings into large farms, production cooperatives exploit economies of scale and achieve higher efficiency. Yet many researchers have in fact shown that agricultural production cooperatives are substantially less efficient than individual and family farms. As a result, production cooperatives in the world are a tiny minority among organizations that produce manufactured goods, agricultural products, or services. According to ICA data, production cooperatives account for less than 5% of all cooperatives in the world Service cooperatives, on the other hand, are the largest and most typical category of cooperatives: these are cooperatives that provide services to their members-producers, who continue to carry out all production activities independently on their own. In contrast to the minor role of production cooperatives in market economies, service cooperatives in many countries 163 Agricultural Cooperatives in Transition Countries account for a large share of transactions in the relevant economic sector. For instance, agricultural marketing, processing, and supply cooperativesare major players in markets for farm products and farm inputs in North America, Western Europe, Japan, and South-East Asia. In the U.S., agricultural cooperatives handle about 30% of farmers’ total farm marketing volume and 28% of farmers’ total supply purchases (Mather et al., 2004). In the European Union, the share of agricultural cooperatives is even larger: in countries such as the Netherlands, Denmark, Ireland, and Sweden 70%-80% of farm products are marketed through cooperatives and cooperatives account for 50%-70% of all farm input purchases (Van Bekkum and Van Dijk, 1997). Service cooperatives may actually employ some of their members as workers, but most employees (and even most managers) are hired outsiders. Service cooperatives use members’ share contributions to capital and borrowed funds to finance purchase of goods and services from various market sources and then resell these services to members at advantageous prices. Consumer cooperatives in Western nomenclature are trading firms that sell consumer goods primarily to their members at advantageous prices. They are basically a variety of supply cooperatives (outside agriculture), but they are treated as a separate class because of their numerical importance in the world. The largest segment of consumer cooperatives is cooperative food stores and supermarkets (“grocery stores”), but cooperative stores that sell clothes, housewares, appliances, and even cars to their members – at advantageous prices – also fall in the category of consumer cooperatives. In the West, consumer cooperatives, unlike other service cooperatives, are most likely to deal with nonmembers (“third parties”) on a regular basis: this is their strategy of achieving growth comparable with other firms in the highly competitive consumer services sector. Consumer cooperatives typically charge a higher price on their transactions with non-members. Ukraine and Kazakhstan Legislation on Agricultural Service Cooperatives The USSR Law on Cooperation The first mention of cooperatives in Ukrainian and Kazakh legislation actually predates independent Ukraine and Kazakhstan, occurring in the USSR law “On Cooperation in the USSR” (1988). This law set the precedent for subsequent legislation in that it considers two main types of cooperatives—consumer (potrebitel’skie) and production (proizvodstvennye) cooperatives. However, the 164 10. Agricultural Cooperative Development in Kazakhstan and Ukraine conceptual distinction between the two types (article 3.2) is not mutually exclusive. Production cooperatives are defined to “produce goods, products, works and also render paid services…. They are created and operate for production, procurement, processing and marketing of agricultural production….” Consumer cooperatives serve the demand of their members and other citizens in trade and service industries, as well as their members for housing, dachas and garden plots, garages and parking places for automobiles, socialcultural and other services. In addition to these functions, consumer cooperatives may also develop various production activities, which are not necessarily limited to processing and may include “subsidiary” agricultural enterprises. The 1988 law is usually credited with being the first step toward private enterprise and market economy in the USSR under the guise of “cooperatives”, which were defined as new organizational forms free from strict state control – but without adherence to Western cooperative principles. Yet this 1988 law (articles 45-46) also perpetuates the traditional Soviet system of state-controlled “consumer cooperation” (sistema potrebitel’skoi kooperatsii), which operated in rural areas since the early 1920s and was primarily designed to provide farm services (product marketing, input supply) to household plots and consumer services (through trading outlets) to the rural population in general. Since the Soviet “consumer cooperation system” was in effect a system of (state-run) service facilities for small producers and rural people, a semantic link was forged in Russian between “consumer cooperative” and “service cooperative”. The term “consumer cooperative” is accordingly still used in the legislation of some CIS countries (in particular, Kazakhstan) in the sense of “service cooperative”, while other countries (e.g., Ukraine, Kyrgyzstan) have adopted the Western term “service cooperative”. Ukraine Cooperative Law The basic law on agricultural cooperatives under independent Ukraine (On Agricultural Cooperation, 1997) represented an immense improvement over the 1988 USSR law. This law seems to be drafted in accordance with the principles of the International Cooperative Alliance. The concept of “consumer cooperative” was replaced with the Western concept of “service cooperative” (obsluzhivaiushchii kooperativ in Russian, obslugovuiuchii kooperativ in Ukrainian), and the conceptual distinction between production and service cooperatives is clear. An agricultural production cooperative is defined in article 1 of the law as “an agricultural cooperative formed by the union of physical persons who are agricultural producers for joint production or other activities according to the principle of obligatory labor participation with the goal of 165 Agricultural Cooperatives in Transition Countries making a profit.” An agricultural service cooperative is “an agricultural cooperative formed through the union of physical and/or legal persons who are agricultural producers for the organization of services aimed at reducing costs and/or increasing incomes of the members of the cooperative in their agricultural activities.” Agricultural service cooperatives service their members “without the goal of making a profit and are non-profit organizations (art. 9).” With the additional law “On cooperation” (On cooperation, 2004) the basic legal framework in Ukraine for agricultural service cooperatives was defined. The 1997 and 2004 laws have been amended many times over the past decade and a half with the aim of improving the enabling environment for cooperatives in Ukraine. The last amendment to the law “On agricultural service cooperation” was passed by the Parliament on 20 November 2012 and was endorsed by the President of Ukraine on 19 January 2013. Kazakhstan Cooperative Law The basic definitions of cooperatives as a corporate form of organization appear in the Civil Code, which was originally adopted in 1994 and then repeatedly amended. Unlike Ukraine, however, Kazakhstan has never adopted the term “service cooperative” in its legislation and continues to use the traditional Soviet terms for the dichotomy of cooperatives: “production cooperative” (proizvodstvennyi kooperativ) and “consumer cooperative” (potrebitel’skii kooperativ). Despite the retention of the traditional Soviet term “consumer cooperative”, this concept in Kazakhstan has been detached from the sweeping concept of “rural consumer cooperation system” (the Soviet-model potrebsoyuz), which is intended (on paper) to serve the entire rural population at the level of household plots, providing collection/marketing of produce and extending consumer goods sales through a network of stores in villages. A detailed definition of production cooperative was included already in the 1994 version of the Civil Code (art. 96-101), where it is basically consistent with the Western concept of production cooperative. A new definition of consumer cooperative was added in 1998 (art. 108), and it became clear that the term “consumer cooperative” in Kazakhstan is in effect identical with the Western term “service cooperative”. Production cooperatives are defined as “commercial” (i.e., “for profit”) organizations employing members’ labor. Service (“consumer”) cooperatives are defined as “non-commercial” (i.e., “not for profit”) organizations that may employ hired labor. Non-commercial organizations may not distribute their surplus (“profit”) to members: all profits must be retained as cooperative equity (Law of Non-commercial Organizations, January 2001, art. 2; this principle is explicitly specialized to service cooperatives in art. 14(4)). 166 10. Agricultural Cooperative Development in Kazakhstan and Ukraine Five cooperative-related laws were passed between 1995 and 2003, elaborating on the basic definitions in the Civil Code: N N N N N Law of Production Cooperative (1995) Law of Rural Consumer Cooperation (1999) Law of Agricultural Partnerships and Their Associations (2000) Law of Consumer Cooperatives (2001) Law of Rural Consumer Cooperatives of Water Users (“Water User Associations”, 2003). The laws clearly define the main types of cooperatives – production and service (or “consumer”) cooperatives and there is generally no ambiguity as to cooperative types in Kazakh legislation. The only quirk is that the Russian term “consumer cooperative” (potrebitel’skii kooperativ) should be consistently rendered as “service cooperative” in English. Comparative analysis of the five laws shows that they mostly repeat the same cooperative principles and attributes. All cooperatives are voluntary associations of users who have a common goal and engage in common activities, the cooperative is created by a general assembly of its founding members, the assets of a cooperative represent the sum total of members’ contributions (“shares”) and cumulative retained profits, all cooperatives primarily serve their members but may also engage in transactions with non-members. The Law of Agricultural Partnerships holds a somewhat special place, as it explicitly stipulates that an agricultural partnership sells its services to members at cost, so that no profit is created. The services provided by an agricultural partnership to its members include marketing, storage, processing of farm products, supply of farm inputs, etc. An agricultural partnership is thus essentially a classical service cooperative. Taxation of Cooperatives A cooperative is a legal body that deals with other legal bodies (agricultural enterprises and peasant farms) and also with smallholders who are not registered for tax purposes (e.g., household plots). The cooperative as a legal body is subject to taxation, which includes both profit tax and VAT. Smallholders, on the other hand, are typically exempt from these taxes or avoid them in various semi-legal ways. As a result of the taxes that cooperatives pay, a smallholder dealing through a cooperative is likely to net less from marketing transactions (or pay more for purchasing transactions) than the amounts he would have received (or paid) by dealing directly with buyers and suppliers. These tax distortions place cooperative members at a disadvantage compared to those who operate independently. 167 Agricultural Cooperatives in Transition Countries Conceptual Issues of Cooperative Taxation Profit tax and cooperatives. Although in principle cooperatives are non-profit organizations, their financial reports may show an accounting profit at the level of revenues and expenses (called “surplus” in Western cooperative accounting). This accounting profit is created because the cooperative may have initially underpaid its members for products delivered (expenses too low) or overcharged them for inputs supplied (revenues too high). In effect the accounting profit is the result of internal pricing decisions within the cooperative, and not profit in the usual economic sense of the term. Cooperatives do not know in advance, at the time of the actual transaction, how much to pay to members for product deliveries and how much to charge for input supplies and other services. Financial settlements with members are handled in two waves: the first-wave payments and charges are in the nature of an initial advance, and the final settlement is made at the end of the period, when the cooperative financial statements have been prepared. As a result, a service cooperative usually presents a financial statement that shows a positive surplus (accounting profit) or a deficit (accounting loss) according to the scheme in Table 10.3. Table 10.3. Schematic “profit and loss” statement of a cooperative Marketing service cooperative Supply service cooperative Revenues from sale of members’ products to Revenues: first-wave payments from members third parties Costs: Costs: First-wave payments to members Paid to suppliers Operating costs of the cooperative Operating costs of the cooperative Revenues – Costs = Gross income (surplus/deficit) Less allocation to reserve fund and other funds Less distribution in proportion to share contribution (iZ_\u_ \uieZlu, “dividends”) Difference available for distribution as patronage refunds (dhhi_jZlb\gu_ \uieZlu) Gross income (dokhod in Russian) represents the surplus or deficit that is further allocated via three channels: 1) Allocation to the cooperative reserve fund or other capital funds (“retained earnings” in standard accounting terminology). 2) Distribution to members in proportion to their share contribution to the cooperative capital (“dividends” in standard Western terminology; paevye vyplaty in Russian). 168 10. Agricultural Cooperative Development in Kazakhstan and Ukraine 3) Patronage refunds (kooperativnye vyplaty in Russian) in proportion to members’ use of cooperative services (i.e., basically in proportion to firstwave payments to the members). The sum of the three amounts distributed to members is equal to gross income. Patronage refunds are determined as the difference between gross income and the first two allocations. Conventional interpretation of the tax code will require the cooperative to pay tax on the full gross income at applicable rates. Recognition of the special nature of patronage refunds in cooperatives (as second-wave adjustment of initial overor under-payment to members) suggest that this component of gross income should not be taxable. This is the essence of the principle of “fiscal transparency” applied to cooperatives in the Netherlands, where transactions between members and their cooperative are exempt from all taxes. Furthermore, the U.S. tax code recognizes “dividends” paid to members in agricultural cooperatives (but not other cooperatives) as non-taxable at the cooperative level, i.e., exempt from withholding taxes (Autry and Hall, 2009). If the Dutch and the U.S. tax principles are adopted, the cooperative will be required to pay tax only on the share of gross income retained in reserve fund and other capital funds. The amount retained in the reserve fund and other capital funds will be shown net after deduction of the appropriate taxes. Value added tax (VAT) and cooperatives. In buy-and-sell transactions between legal bodies, the seller (a peasant farmer, say) charges VAT on his sale and the buyer will deduct from his ultimate VAT liability the amount of VAT charged by the seller. Thus, the buyer will pay the seller $100 for his tomatoes plus $20 VAT. Reselling the tomatoes for $110, the buyer will add $22 VAT, but his net VAT obligation will be only $2 ($22 less $20 paid to the original seller). If, however, the seller is a physical body (a smallholder not registered for tax purposes), he does not pay VAT and charges the buyer $100 for the tomatoes, without adding VAT. In this way, when the buyer – a legal body – sells the tomatoes for $110 plus $22 VAT, there is nothing to offset against this VAT and the seller’s actual VAT obligation is $22. The buyer will naturally attempt to charge this extra “cost” back to the original seller, paying less than $100 for the tomatoes. The smallholder is thus at a clear disadvantage when selling his products to a legal body (e.g., a cooperative). A similar chain can be traced for purchase transactions. The seller of inputs (a cooperative) charges VAT on the sale transaction. A peasant farmer (legal body registered for tax purposes) can offset the amount of VAT against his cumulative VAT obligations. For a smallholder, on the other hand, the actual cost is the cost 169 Agricultural Cooperatives in Transition Countries of input plus the amount of VAT, which he must absorb. A smallholder would be better off by dealing with a small private supplier who does not charge VAT rather than with the cooperative. The only fair way to deal with the VAT issue is to exempt all transactions between cooperative members and the cooperative from VAT altogether. Cooperative laws and the Tax Code should recognize that cooperative members do not sell their production to cooperatives, but only transfer it to the cooperative for marketing. In this respect, the cooperative is an extension of the farm itself. Ukraine: Taxation of Cooperatives Beginning in 2013 the Ukrainian law on agricultural service cooperatives explicitly recognizes the non-profit status of service cooperatives.18 However, the Ukrainian Tax Code still does not recognize the non-profit status of these cooperatives. Thus, agricultural service cooperatives are required to pay profit tax on their gross income (see Table 10.3), like other legal entities, such as joint stock companies. A partial solution to this issue (introduced into the Tax Code on 1 January 2013) was reached according to which the profit tax for service cooperatives is assessed on its net income after subtracting all “mandatory and dividend payments,” 19 meaning that the profit tax is assessed on the net income available for distribution as patronage funds. This compromise still subjects farmers who join cooperatives to double taxation, but the tax base has been reduced considerably. A bill to amend the Tax Code to ensure that agricultural service cooperatives are considered non-profit entities was introduced into the Ukrainian Rada in March 2012 by the Communist parliamentary faction, but has not been passed. Service cooperatives, like all legal bodies, are subject to VAT in Ukraine, including VAT on transactions with their members. Thus, in Ukraine smallholders are at a disadvantage when buying and selling from cooperatives, as described in the previous section. A further disincentive to join a cooperative is that by joining a service cooperative any agricultural producer that is a legal person risks losing the tax benefits that accrue by virtue of its agricultural producer status. This risk is a powerful disincentive for agricultural producers to buy and sell through 18 Ukrainian law “On changes to the Law of Ukraine On Agricultural Cooperation” ‹-VI (20 November 2012). 19 Allocations made to reserve funds and other funds and payments made as share contributions (dividends). See above Table 10.3 for explanation. Law of Ukraine “On changes to the Tax Code of Ukraine for regulation of certain taxation issues,” (2 October 2012) no. 5412-VI. 170 10. Agricultural Cooperative Development in Kazakhstan and Ukraine agricultural service cooperatives. The status of service cooperatives as legal persons subject to both profit taxes and VAT sets them apart from agricultural producers, which since 1998 have been subject to a special tax regime that leaves them nearly untaxed. The two elements of the special regime for agriculture are the fixed agricultural tax (FAT) and the agricultural VAT (AgVAT). The FAT is a flat rate tax introduced in lieu of profit, land and a number of other taxes. Its rate varies from 0.09 to 1% of the normative value of farmland, depending on farmland’s type and location. In 2010, the FAT resulted in an average tax payment of roughly 6 UAH/ha (0.75 USD/ha). This meant that farm profits in Ukraine were virtually untaxed (Nievskiy, 2012). Under the AgVAT agricultural producers accumulate their own VAT payments, but do not transfer them to the government. Instead, they are required to deposit VAT payments in a special account to use for their own input purchases, such as for farming equipment and seeds. Thus, the AgVAT allows agricultural businesses to virtually avoid VAT payments (Nievsky, 2012). Kazakhstan: Taxation of Cooperatives The current Tax Code introduces a so-called “special tax regime” for agricultural producers (enterprises and peasant farms) and specifically also for agricultural (or rural) service cooperatives. Legal entities opting for the special tax regime are understood to be small agricultural producers. They are entitled to follow a highly simplified tax-return system, with minimum accounting requirements, and in addition they pay only 30% of the standard tax rate on all basic taxes (primarily VAT and corporate income tax, as well as land tax, land lease payments to the state, property tax, social tax, vehicle tax). Since the tax code explicitly puts agricultural service cooperatives in the same category with other agricultural producer, there are no blatant tax distortions for cooperatives. Possible distortions may arise for operators of household plots. They only pay personal income tax and their agricultural activities are exempt from taxes. If they join a service cooperative, the cooperative – a legal entity – will be obligated to calculate VAT on their transactions, albeit at the concessionary rate. Another possible distortion stems from Article 448 (para. 3) of the Tax Code (Conception, 2012). According to this curious article, a rural service cooperative is not entitled to follow the special tax regime if its members are at the same time members of another service cooperative or if it has subsidiary enterprises. This provision was originally intended to preclude large agricultural enterprises from enjoying the special-regime tax concessions, but it has run into vocal opposition. In the past, Article 448 was suspended once for the 2010 tax year and it is now again a bone of contention between agricultural tax payers and the government. 171 Agricultural Cooperatives in Transition Countries Conclusion This short review of the status of agricultural service cooperatives in Kazakhstan and Ukraine has shown the difficulties encountered by governments in the region in encouraging the formation of agricultural service cooperatives. While there appears to be widespread recognition by governments of the usefulness of cooperatives, policies designed to support them focus on subsidies for input purchases and subsidized loans. While these policies have been of some help to some, they also seem to have bred a class of “false cooperatives”, i.e., established only for the purpose of gaining access to subsidized credits and inputs, without any regard for true cooperative principles. Furthermore, neither government has succeeded in creating a supportive business environment for this specific self-help organization. Tax disincentives in both countries are an important reason for lagging numbers of working cooperatives. Though the profit tax issue was mostly overcome in Ukraine at the end of 2012, the VAT system in both Ukraine and Kazakhstan discriminates against smallholders making service cooperatives unattractive for precisely the set of farms for which these organizations can be most helpful. In Ukraine, moreover, even farms that are legal entities risk their special tax status by buying or selling through service cooperatives. Finally, neither government has really dealt with the important issue of informing the rural population on the cooperative idea and its benefits. In Ukraine this issue was mentioned as perhaps the most important issue by the participants of the All Ukraine Public Meeting “Ukraine on the Eve of the International Year of Cooperatives” (15 December 2011) attended by service cooperative leaders, regional cooperative activists, as well as researchers, government employees and project personnel connected with development of cooperatives (Korinets, 2013:17). Cooperative Development Centers in the United States are an example of the type of government-private sector collaboration that can accomplish this task. Cooperative Development Centers are non-profit state-level organizations funded by cooperatives themselves and co-funded by the US Department of Agriculture. Their function is to explain the cooperative idea and the specific benefits for those interested, to train in cooperative management skills, and support the public with the business, legal and tax information needed for cooperative startups and management. They also offer individual technical assistance by qualified experts, the costs of which may be covered by the US Department of Agriculture grants for the development of cooperatives. While the type of public-private partnership represented by the US Cooperative Development Centers is an excellent example of an institution to 172 10. Agricultural Cooperative Development in Kazakhstan and Ukraine support the development of cooperatives, there is no substitute for a grass-roots cooperative movement driven by enthusiasm for the cooperative model. 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Agricultural Cooperative Development in Kazakhstan and Ukraine (APD) Institute for Economic Research and Policy (IER) Consulting. Parliament of Ukraine. (1997). “On Agricultural Cooperation” 17 July, 1997, Law of Ukraine 469/97. http://zakon2.rada.gov.ua/laws/show/469/97-%D0%B2%D1%80 Parliament of Ukraine. (2004). “On cooperation,” 11 November, 2004, Law of Ukraine no. 1087-15. http://zakon2.rada.gov.ua/laws/show/1087-15 Parliament of Ukraine. (2005). “On the Main Pillars of State Agrarian Policy to 2015,” Law of Ukraine 2005 no. 2982-IV. http://zakon1.rada.gov.ua/laws/show/2982-15 President of Ukraine. (2000). “On the Means for Development of the Cooperative Movement and Strengthening of its Role in the Market Reform of the Ukrainian Economy,” 3UHVLGHQWLDO 'HFUHH  ‹ . http://zakon2.rada.gov.ua/laws/show/1348/2000 RBK-Ukraine. (2013). “More than 83% of local governments support the formation of agricultural cooperatives” 28.02.2013. http://www.rbc.ua/rus/news/economic/obedinenie-v-selhozkooperativy-uzhepodderzhali-bolee-28022013130900 State Statistics Service of Ukraine (2012). Agriculture of Ukraine 2011: Statistical Yearbook (Kiev). State Statistics Service of Ukraine (2011). Main Agricultural Characteristics of Rural Households in Rural Areas (Kiev). Statistical Agency of Kazakhstan. (2012). Agriculture in Kazakhstan 2009-2011, Statistical yearbook, Astana. www.stat.kz Szabó, G. G., (2012). Support for Farmers’ Cooperatives; Country Report Hungary. Wageningen: Wageningen UR. Tomich, I. F. (2013). “Initsiativa ‘Rodnoe selo’—posledniaia nadezhda selian”, Gazeta.ua, 22.03.2013. http://gazeta.ua/ru/articles/488810 USDA (2012). Cooperative Statistics 2011 (Sarah Ali, Jacqueline E. Penn and E. Eldon Eversull), U.S. Department of Agriculture Service Report 72, October. USDA (2013). USDA Rural Development: Cooperatives, U.S. Department of Agriculture Rural Development web site. http://www.rurdev.usda.gov/LP_CoopPrograms.html USDA-NAS (2013). Farms, Land in Farms, and Livestock Operations 2012 Summary, U.S. Department of Agriculture, National Agricultural Statistics Service, February. Van Bekkum, O. and Van Dijk, G. (1997). Agricultural Co-operatives in the European Union, Van Gorcum, Assen. 175 11. Cooperatives in CIS and Georgia:20 Overview of legislation Zvi Lerman and David Sedik (2014) Cooperatives in agriculture and in other sectors are usually created by grassroots users to overcome market failures, which are manifested in unwillingness of private business entrepreneurs to provide services in areas that they judge unprofitable or, alternatively, in unfair exploitation of the users by private businesses through monopolistic practices. Best-practice world experience suggests that farmers’ service cooperatives provide the most effective way of improving the access of small farmers to market services in both situations. International Cooperative Alliance (ICA) defines a cooperative as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise (ICA, 2013). The persons who voluntarily unite to form a cooperative are usually referred to as members or member-owners. A cooperative is a legal entity and, in a certain sense, it is an analogue of a shareholder corporation. There are, however, some fundamental differences between a cooperative and a corporation, as listed in Table 11.1. Perhaps the main difference concerns the organization’s objective: while business corporations aim to maximize their profit, cooperatives aim to maximize the benefits that members derive from their participation in cooperative activities, including lower prices paid for inputs and services and higher prices received for products (Cobia, 1998). The main areas of activity of agricultural service cooperatives are outlined in Table 11.2. Smallholders in the Commonwealth of Independent States and Georgia (abbreviated here in an ad hoc manner as CIS) are exposed to both dimensions of 20 Since August 2009, Georgia is no longer a member of the Commonwealth of Independent States (CIS). The accepted acronym CIS is used in our context in an ad hoc manner to designate the 11 current members of the CIS plus Georgia. 176 11. Cooperatives in CIS and Georgia: Overview of Legislation market failure mentioned above. After twenty years of transition, there are still not enough private entrepreneurs to satisfy the needs of the huge number of peasant farms and household plots, and smallholders often feel that they suffer from blatantly exploitative practices of private intermediaries due to lack of competition. Table 11.1. Comparative attributes of a cooperative and a shareholder corporation Attribute Owners Owners’ objective Organization’s objective Voting rights Income distribution rules Cooperative Members Use of services provided by the cooperative Maximize members’ benefits from working with the cooperative One member–one vote, regardless of share contribution Income distributed to members in proportion to their participation in the activity of the cooperative Corporation Shareholders–investors Earning income Maximize corporate profits Number of votes proportional to number of shares (i.e., share contribution) Income distributed to shareholders in proportion to the number of shares held Table 11.2. Areas of activity of agricultural service cooperatives Type Marketing cooperatives Processing cooperatives Supply cooperatives Technical farm services Consumer and public services Areas of activity Collection, storage, sorting, packing, sale of farm products; provision of marketing information and services Variety of marketing cooperatives: processing of food commodities (milk, fruits and vegetables, wineries, milling, baking, meat and fish products, cotton gins, oil pressing); sale of processed products Purchase and stocking of farm inputs, resale to member-producers; animal feed Machinery pools, mechanized field works (plowing, harvesting), transport, machinery maintenance; Veterinary services, artificial insemination; Accounting and computer services Agricultural extension and consulting services Development and maintenance of telephone, gas, and electricity networks in rural areas Health-care services Education and training Legal advice Market-oriented scholars accordingly expected to see rapid development of agricultural service cooperatives in CIS in response to smallholder needs (see, e.g., Chapter 5). These expectations, however, have not materialized and the 177 Agricultural Cooperatives in Transition Countries development of agricultural service cooperatives in CIS countries lags far behind the status of cooperative development in most of the world (see Chapter 10). Inadequacy of the legislative framework is often cited among the reasons that may be responsible for the unsatisfactory development of cooperatives in CIS. In this study, we review the cooperative laws in all 12 CIS countries (including Georgia) and examine their compatibility with universal cooperative principles and actual practices in the West. The Dichotomy of Production and Service Cooperatives in CIS One of the features of the cooperative legal framework in CIS is the distinction between agricultural service cooperatives (which idiosyncratically are often called in Russian “consumer cooperatives” – potrebitel’skie kooperativy) and agricultural production cooperatives (proizvodstvennye kooperativy). This dichotomy is hardly ever made explicit in established market economies, where practically no production cooperatives exist and “agricultural cooperative” is automatically understood as “agricultural service cooperative”. In CIS countries, on the other hand, “agricultural cooperative” is automatically understood as an “agricultural production cooperative” and the adjective “service” must be explicitly added in Russian to clarify that an agricultural service cooperative is actually meant (obsluzhivayushchii kooperativ, servisnyi kooperativ). This is a curious situation for a region (former Czarist Russia) that had a developed system of service cooperatives before the 1917 Bolshevik revolution (Epshtein, 1993; Serova, 1991), practically without any production cooperatives (artel’, as they became known in Russian in the early part of the 20th century). The paradigm shift dates back to the 1920s, when Lenin proclaimed his socialist vision of the development of cooperatives: gradual and voluntary movement from lower to higher forms of cooperation, from marketing, service, and credit cooperatives to highest forms of production cooperatives (Osipov, 1960; see also Lenin, 1923). This vision, presenting production cooperatives as the highest form of cooperation, was subsequently implemented in Stalin’s collectivization drive (from 1928-1929 through the 1930s), which eventually transformed agriculture in all countries of the Soviet Union (the predecessors of CIS) to agriculture of collective farms, i.e., production cooperatives. Thus, contrary to the situation in developed market economies, tens of thousands of production cooperatives existed in CIS in the form of collective farms (kolkhozes) well into the post-1992 transition and many continue to exist in the form of “agricultural cooperatives” after the reforms that eliminated the collective farms (see, e.g., Golovina et al., 2012). 178 11. Cooperatives in CIS and Georgia: Overview of Legislation Perhaps the main difference between a service cooperative and a production cooperative is the status of a member vis-à-vis the cooperative. A service cooperative is an association of members-producers who retain their legal and operational independence, with production activities conducted on memberowned farms outside the cooperative (Figure 11.1). Participation in cooperative activities – marketing, input purchasing, machinery services, etc. – is obligatory, but members are not required to contribute their labor by working in the organization. The service cooperative in turn conducts transactions primarily with its members, not with third persons. It is expected that the service cooperative will be able to achieve, through economies of size, higher prices for the integrated sale of members’ products and lower costs for the bulk purchase of inputs for the members. This price advantage is the benefit that members derive from the service cooperative. Figure 11.1. Schema of a service or consumer cooperative. Figure 11.2. Schema of a production cooperative. In a production cooperative, on the other hand, members typically work inside the cooperative, and not as independent entities (Figure 11.2). They engage in joint production using pooled resources (land or machinery); the cooperative sells the jointly produced output in the market and purchases inputs for the joint production process – not for individual members. The production cooperative conducts business transactions primarily with third persons and remunerates the member-workers from its operating revenues and surpluses. Like a service cooperative, it strives to benefit its members, but in a different way: the benefits to members come through providing them with a secure workplace and a satisfactory salary (income) that could be otherwise difficult to achieve. The theory behind production cooperatives is that economies of scale work in primary agriculture and that joint production on large tracts of pooled land is more efficient and profitable than individual production on small plots (a claim that has 179 Agricultural Cooperatives in Transition Countries never been proved for primary agriculture). Despite these substantive differences between production and service cooperatives and the frequent promulgation of separate laws for the two types of cooperatives in CIS, the legal definitions of their operating scope are virtually identical: only one function – “production” – distinguishes between the list of activities prescribed for service cooperatives and production cooperatives in the civil codes and cooperative laws of CIS countries. Other than “production”, both service and production cooperatives are legally allowed to engage in the full range of agricultural service and support activities. The 2013 Tajikistan Law of Cooperatives states, without elaboration, that production cooperatives may engage in production alongside a range of other activities, while the 1999 Tajikistan Civil Code elaborates the “other activities” by listing processing, marketing, contract work, trade, and consumer services – all of which are standard functions of a service cooperative. A recent survey of cooperatives and cooperative members in Kyrgyzstan (see Chapter 9) has actually shown that, in addition to joint production based on member labor inputs, production cooperatives also provide farm services to non-members – independent peasant farmers and household plot operators who are not part of the joint production system. The activities of service cooperatives are thus a subset of the activities envisaged for production cooperatives in CIS legislation; production cooperatives may engage in the same service activities plus primary production. It is therefore understandable how some CIS countries managed to incorporate both production and service cooperatives in one cooperative law (see row 3 of the comparative analysis of cooperative laws in Table 11.5). Table 11.3. Differences in legal classification of cooperatives in CIS legislation Production cooperative Legal body Commercial (“for profit”) organization Sales to third parties only Members part of the labor force Consumer (service) cooperative Legal body Non-commercial (“not-for-profit”) organization Sales mostly to members Members not necessarily part of the labor force It seems that the legal distinction between production and consumer (service) cooperatives in CIS legislation is not based on functional attributes (i.e., what the cooperatives do). Instead, cooperatives are classified based on formal businessrelated attributes (Table 11.3), such as profit-making behavior (“commercial”, i.e., “for profit” organizations and “non-commercial”, i.e., “not for profit” organizations), clientele orientation (sales to members or non-members), and composition of the labor force (members work or do not work in the cooperative). Unfortunately, these formal attributes are ambiguous and fuzzy for cooperatives and are not suitable for unambiguous classification. 180 11. Cooperatives in CIS and Georgia: Overview of Legislation In theory, a cooperative – whether a service cooperative or a production cooperative – is a “zero-profit” organization: it may distribute all its operating surpluses to members through adjustment transactions motivated by cooperative principles and end up with zero bottom line in the statement of financial results. Payments to members for their products (or for their work in production cooperatives) and charges for inputs and services are regarded as advances when they are routinely made during the year. In a service cooperative, surpluses may arise if, for instance, the cooperative initially paid the members for their products less than what it eventually received in the market (“underpayment”), or alternatively if the cooperative initially charged for services more than the actual cost (“overcharging”). In a production cooperative, surpluses may arise if the salaries paid to member-workers over the year were too low compared to the final revenues reported at the end of the period. In both situations, the surpluses can be distributed to members (in proportion to their participation in the cooperative activities) so that the cooperative reports zero accounting profit. Whether or not a cooperative is viewed as a “zero-profit” organization naturally has an impact on its tax liabilities. The prevailing practice in established market economies is to recognize service cooperatives as non-profit entities and to exempt payouts to members from taxation at the level of the cooperative (see, e.g., Autry and Hall, 2009; Dutch Cooperative, undated); thus, only the retained portion of the surplus, if any, is taxed. On the other hand, no clear pattern with respect to tax status can be distinguished in CIS legislation. Many CIS countries treat production cooperatives as “for profit” manufacturing corporations and tax them in full. The treatment of service cooperatives varies: some countries treat service cooperatives also as “for profit” (“commercial” in Civil Code terminology across CIS) entities and tax their surpluses before distribution to members, while other countries are beginning to allow “not for profit” (“noncommercial”) status to service cooperatives and exempt their surpluses from taxes. It seems that ongoing tax legislation reforms will do nothing with regard to the taxable status of production cooperatives while pushing all service cooperatives toward taxexempt “not for profit” status. Inventory of Cooperative Laws in CIS Legislation on cooperatives in CIS is usually organized on three levels. The general legislative level includes primarily the Civil Code, which is the foundation for the definition of cooperative as a legal form, and the Tax Code, which introduces cooperative-specific taxation provisions (if and when necessary). On the next level, we have cooperative-specific laws, which are devoted in their entirety to treatment of cooperatives as a separate organizational 181 Agricultural Cooperatives in Transition Countries and functional form. These may be separate laws for different types of cooperatives (production, service, consumer), a law on all agricultural cooperatives, or a law on cooperation including both agricultural and nonagricultural cooperatives. In this category, we also have special laws on Water User Associations (especially in Central Asia) and credit unions (credit cooperatives) – recent innovations formulated and adopted during the transition. The cooperative-specific laws are supported by implementation-enabling government resolutions (third-level supporting legislation).21 The various cooperative laws in the 12 CIS countries are inventoried in Table 11.4. After this chapter had been written, FAO’s Regional Office for Europe and Central Asia (FAO/REU) developed a database of cooperative laws in the countries of the former Soviet Union, including excerpts relating to cooperatives from the Civil and Tax Codes for each country (Compendium, 2016). The laws in the compendium are current as of 2015-2016 and they are regularly updated with inputs from each country when new legislation on cooperatives is passed by national parliaments. Content of Cooperative Laws Across CIS ILO recommendations for cooperative legislation (Henry, 2012) set out the following bullet points for the main contents of a standard cooperative law: 1. 2. 3. 4. 5. 6. Preamble: cooperative principles General provisions: definition of cooperative Formation and registration Membership Organs/bodies and management Capital formation, accounts, surplus distribution and loss coverage 21 The terminological tangle is exacerbated when we notice that in addition to “laws of cooperatives” the CIS countries also have so-called “laws of consumer cooperation”, which were passed in 1991-1992 based on Soviet concepts of cooperation as enunciated in the 1988 USSR Law on Cooperation. These “laws of consumer cooperation” deal with so-called “rural consumer societies” – part of a centrally imposed state-run system (formerly known as Tsentrosoyuz in the Soviet Union) whose function was to supply consumer goods to the rural population and sell the output produced on household plots. The “consumer cooperation system” is dormant today in rural areas, but its administrators in the center remain a powerful lobby. The system, although hardly functioning, is so entrenched in former Soviet countries that Tajikistan, for instance, was forced to retain the 1992 Law of Consumer Cooperation in its statutes in parallel with the new 2013 Law of Cooperatives. The “consumer societies” should be clearly distinguished from the current concept of “consumer cooperatives” confusingly used as a synonym for “service cooperatives”. At the risk of increased terminological confusion, we should mention that, on paper, the “consumer societies” share many characteristics with the Western concept of rural consumer cooperative – i.e., a local “coop store” that supplies consumer goods in the village, thus saving the residents the need to travel to town more than is absolutely necessary. 182 11. Cooperatives in CIS and Georgia: Overview of Legislation 7. Audit 8. Dissolution 9. Simplified cooperative structures 10.Horizontal and vertical integration 11.Dispute settlement Table 11.4. Inventory of cooperative-related legislation in CIS Region/country European CIS Belarus Civil Code Cooperative laws Production coops only (Dec1998, Sec. 3, art. 107-112) N Production coops (collective farms): standard kolkhoz statute (Presidential Decree, Feb2001) N Law on cooperation (Jan1992) N Consumer cooperation (Sep2000) N Business (entrepreneurial) coops (Apr2001) N Production coop (Apr2002, upd. 2010) N Draft law on producer groups (2013) N Law Ag Cooperation (Dec1995, upd. Dec2011) N Production coops (May1996, upd. Nov2011) Moldova General non-specific definitions (6Jun2002, Part 3, art. 171-178), anticipating specific coop legislation Russia Production cooperatives (commercial entities) Consumer (=service) cooperatives (non-commercial entities) (Oct1994, Ch. 4, Sec. 3, Art. 107-112; Sec. 5, Art. 116) Production coops only (Nov2012 update, Ch. 8, Art. 163-166) Ukraine Transcaucasia Armenia General non-specific definition, either commercial or non-commercial entities (28July1998, Ch. 5, Sec. 1, art. 50, 51; Sec. 3, art. 117-121) Georgia No mention of cooperatives Azerbaijan Cooperatives are commercial entities (Dec1999, Ch. 2, Art. 109-113) 183 N Law on Cooperation (Nov2004, upd. Jun2009) N Law on Agricultural Cooperation (Nov2012, eff. Jan2013) N Law on Consumer Cooperation (Dec1993, marginal update Oct2011): Soviet heritage inconsistent with Civil Code N Ongoing donor and government initiatives without clear legislative support N Law on Entrepreneurs 2008-2012 (Ch. 5) N Draft Law on Farmers Groups (Mar2013) N Law on Agricultural Cooperatives (Jul2013) N Law on Cooperation (Feb1996) N Draft law on Agricultural Cooperation, 2010-2013 (2nd reading after Mar2013) Agricultural Cooperatives in Transition Countries Table 11.4 (continued) Region/country Central Asia Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Civil Code Cooperative laws Initially production coops only (Dec1994, art. 96-101), subsequently updated to include consumer (=service) coops (1998, art. 108) N Law of Production Cooperatives (1995) N Law of Agricultural Partnerships and Their Associations (2000) N Law of Consumer (=Service) Cooperatives (2001, upd. Dec2012) N Law of Rural Consumer Cooperation (=Rural Service Cooperatives) (1999, upd. Dec2012) N Law of Cooperation (1991) N Law of Cooperation (1999) N Law of Cooperatives (2005) General non-specific definition, either commercial or non-commercial entities (May1996, upd. 2010, Ch. 5, Sec. 1, Art. 85; Sec. 3, Art. 152-153) Production cooperative (commercial entity) (Art. 118-123) Consumer cooperative (noncommercial entity) (Art. 128) (Jun1999, upd. 2010 Chapter 4, Sec. 1, 3, 5) Duality of definition as in Uzb No mention of cooperatives (Aug2012) Production cooperative (commercial entity) (Sec. 2, Art. 69) Consumer cooperative (noncommercial entity) (Sec. 3, Art. 73) Both definitions compatible with notion of service cooperative; see Taj (Mar1997, repeatedly updated to Sep2010) N Law of Consumer Cooperation (1992, upd 2008) N Law of Production Cooperatives (2002) N Law of Cooperatives (2013) N Law of Consumer Cooperation (1991) N Law of Peasant Associations [Production Coops] (1995) N Law of Consumer Cooperation (1991, revised 1993-98) N Law of Agricultural [Production] Coops (Shirkats) (1998, updt to 2013) By and large, the cooperative laws in all CIS countries where they exist are formally structured according to these blocks. This applies not only to the relatively recent cooperative laws heavily influenced by donor views (Azerbaijan, Kyrgyzstan, Tajikistan), but also to much of the older legislation based on the traditional Soviet template. While it is useful to keep these bullets as a formal checklist for “clearing” cooperative legislation across countries, we will move from this strictly structural level to more substantive content reflecting the treatment of basic conceptual issues in CIS cooperative laws. In line with the conceptual discussion above, we review the CIS legislation on cooperatives by the following parameters: 184 11. Cooperatives in CIS and Georgia: Overview of Legislation N N N N N N N N N N N N Existence of cooperative laws Acceptance of ICA cooperative principles Objectives Separate laws for service and production cooperatives Membership (physical/legal bodies) Participation in cooperative activity Contribution of member labor to cooperative Distributions to members Cooperative profits and tax status Clientele Multilevel structure of the cooperative system Ability to invest individual land shares in cooperative equity The review is presented in Table 11.5, with each row covering one of the issues above. Since most countries have adopted multiple cooperative laws over the years, the information in Table 11.5 is based on the latest law currently in force (identified in the notes to the table). Cells marked N.A. in Table 11.5 reflect situations when the existing law does not touch at all on the relevant issue. Below we elaborate in more detail the various issues covered by the rows of Table 11.5. Existence of Cooperative Laws Practically all CIS countries have cooperative-specific laws in their statutes (see Table 11.4). Almost the only exceptions are Belarus and Turkmenistan, where agricultural cooperatives are still identified exclusively with collective farms. Uzbekistan, another CIS country that emphasizes collective farms and production cooperatives, has nevertheless elaborated its law of production cooperatives (shirkats) to include cooperative attributes ranging beyond the limited scope of collective farms. Curiously, Armenia – originally one of the leading reformers in the CIS – still has not passed a coherent up-to-date law of cooperatives, although various drafts are being debated on donor initiatives. There appears to be a singular lack of political will in Armenia to push in the direction of proper cooperative legislation. Armenia still relies on the 1993 Law of Consumer Cooperation based on the Soviet tsentrosoyuz model of rural consumer societies guided by a national union. 185 Table 11.5. Main characteristics of agricultural cooperatives as reflected in CIS legislation Bel No Mol Yes Rus Yes Ukr Yes Arm Yes Geo Yes Az Yes Kaz Yes Kyr Yes Taj Yes Yes (implicitly in kolkhoz statute) Yes; separate definition in Civil Code Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No; but no distinction in law between two types No Yes No: law covers all forms of coops Membership: physical & legal bodies Yes (implicitly : right to associate) Yes (serv.) No (prod.) Combined prod/serv law plus separate law on prod coop Yes; specific mention of hh plots Yes Yes (other coops) Yes (only physical in prod coops) Yes Minimum age Minimum number Participation in cooperative activity Contribution of member labor to cooperative Preferential prices for members Distribution of income to members 18 N.A. N.A. 16 5 Yes 16 5 Yes 16 3 Yes N.A. (only physical in rural consumer societies) 16 30 N.A. 18 3-5 Yes 16 3 Yes Yes Yes (prod only) N.A. N.A. N.A. N.A. No (serv.) Yes (prod) Yes N.A. N.A. N.A. Yes (prod coops only) N.A. Yes Yes Income net of member transactio ns N.A. Yes Yes Acceptance of ICA cooperative principles Objectives: benefit members Separate laws for service/production cooperatives 186 Tur No: created by order “Rural pop” Uzb Yes No: law covers all forms of coops Yes Yes Yes Yes No Yes 18 2 Yes 18 7 Yes 16 3 Yes Adults N.A. N.A. 16 N.A. N.A. No N.A. Yes Yes Yes Yes N.A. Yes Yes N.A. No Yes Yes N.A. Yes; in propor. to asset share Yes (social infrastr.) Table 11.5 (continued) Bel Prod coop (commer.) Consumer coop (noncommer.) Mol Commercial entity; no VAT on transactions w. members* Rus Prod coop (commer.) Consumer coop (noncommer.) Clientele: members & nonmembers N.A. Yes (50%) Yes (50%) Multilevel structure Yes (implicitly : right to associate) Yes Yes Yes Cooperative tax status: non-commercial entity, tax exemptions Land transferred to coop Ukr Non-profit entities; transactio ns with members do not contribute to income N.A. Arm No: either form Geo Yes Az Tax credits for ag producers extended to service coops Kaz Yes Kyr Yes N.A. N.A. Yes Yes N.A. N.A. Yes (service coops) Yes Yes No (serv.) Yes (prod) Tur N.A. N.A. Taj Noncomm (mainly trans.with members) Comm (mainly w/nonmembers) Yes Yes Yes N.A. N.A. Uzb Prod coop (commer.) Consumer coop (noncommer.), taxexempt Yes: hired labor Yes No (lease Yes Yes N.A. Yes Yes No (lease Yes for N.A. Yes (prod only) only) joint use, coops only) excl. own plots Bel: Civil Code (Dec1998), Production coops (collective farms): standard kolkhoz statute (Presidential Decree, Feb2001); minimum age: age of adulthood from Civil Code (by default). Mol: Law on Business (entrepreneurial) coops (Apr2001); *Tax Code (2013), Part III, Ch. 4, art. 103(1): 22) Rus: Law on Agricultural Cooperation (Dec1995, upd. Dec2011) Ukr: Law on Cooperation (Nov2004, upd. Jun2009), Law on Agricultural Cooperation (Nov2012, eff. Jan2013) Arm: Civil Code (28July1998, Ch. 5); Law of Consumer Cooperation (1993); minimum number of members is given according to Law of Consumer Cooperation (1993) for a rural cooperative society Geo: Law on Entrepreneurs (25May2012), Law on Agricultural Cooperatives (12July2013), Law on Cooperation (Feb1996) Az: Civil Code (Dec1999, Ch. 2, Art. 109-113), Law on Agricultural Cooperation (draft, 2nd reading, Apr2012), Kaz: Law of Rural Consumer Cooperation (1999, upd. Dec2012), Law of Consumer Cooperatives (2001, updated Dec2012) Kyr: Law of Cooperatives (2005), Tax Code (2009) Taj: Law of Cooperatives (2013) Tur: Law of Peasant Associations [Production Coops] (1995) Uzb: Law of Agricultural [Production] Coops (Shirkats) (1998, updated to 2013), Tax Code (2007-2013) 187 Agricultural Cooperatives in Transition Countries Cooperative Objective Supplementing the ICA principles, most laws explicitly recognize that the objective of a cooperative is to increase the benefit of its members. The only exceptions are Belarus, Turkmenistan, Uzbekistan – the countries without fullfledged cooperative law that continue to identify cooperatives with collectivefarm structures. In Uzbekistan, the objective of production cooperatives (shirkats) is defined as improving “rural social infrastructure”, and in Turkmenistan it is defined (for production-based peasant associations – daikhan berleshik) as working for the benefit of the “rural population”. In Belarus, the standard statute of a kolkhoz (which has the force of a kolkhoz law) describes at length how the kolkhoz works to improve the situation of the members and of the rural population at large, without specifically formulating member benefits as the cooperative objective. This is as close as the laws in these three countries come to defining member benefits as the cooperative objectives. Probably nothing should be done about this omission at the present stage: it will need to be taken care of, alongside with other deficiencies, when the three countries are ready to promulgate proper cooperative laws, fully recognizing cooperatives of all different types. As part of the goal of maximizing member benefits, some countries explicitly include a provision that guarantees preferential prices to members. Most countries, however, are silent on this point. The Moldova Law of Production Cooperatives paradoxically includes a provision that prohibits “granting any preferential rights to cooperative members” (art. 14(2), amended May 2008). The only acceptable interpretation of this article is that it excluded granting preferential rights to some members over other members of the same cooperative, not over non-members. Dichotomy Between Production and Service (“Consumer”) Cooperatives The prominent role of production cooperatives in CIS countries (as successors of Soviet-era collective farms) is reflected in the prevailing service/production dichotomy, which is often “canonized” in separate laws for the two types of cooperatives. Six of the twelve CIS countries have separate laws for production and service cooperatives on their statutes (see Table 11.5). This is not the recommended practice in market-oriented economies. The ILO guidelines for cooperative legislation recommend “one law for all types of cooperatives, possibly with specific parts/chapters for specific types of cooperatives” (Henry, 2012, p. 59), and CIS countries indeed seem to be moving in this direction in their 188 11. Cooperatives in CIS and Georgia: Overview of Legislation recent legislative attempts (Kyrgyzstan, Tajikistan, Azerbaijan, and perhaps most notably Ukraine). According to the ILO guidelines, the one-law approach, among other benefits, diminishes bureaucracy and prevents fragmentation of the cooperative system that inevitably weakens its self-monitoring and lobbying power. Reduction of bureaucracy is a particularly important benefit in the highly bureaucratized and corruption ridden former Socialist economies. Cooperative Membership Membership in a cooperative, according to ICA principles, is subject to the “open door” policy, ensuring both freedom of entry and freedom of exit. This is typically reflected in CIS cooperative legislation. Individual members are usually required to be adults (older than 16 or in some countries older than 18) and the prevailing laws generally impose a minimum membership for the creation of a cooperative (Table 11.5, rows for minimum age and minimum number). The minimum number of members in CIS laws ranges from 2 to 7, while the ILO recommendations suggest 3 as the minimum: with fewer than 3 members, “the associative or group entrepreneur character of cooperatives becomes doubtful” (Henry, 2012, p. 73). From considerations of freedom of association, the minimum number of members in a cooperative should be kept as low as possible and no maximum should be imposed. Consistently with the ILO conception, CIS cooperative laws do not impose a maximum membership in cooperatives. Cooperatives are allowed to create associations, unions, and other agglomeration, which implies that, in principle, both physical and legal persons may be members of a cooperative. The nature of a production cooperative requires personal participation in cooperative production activities and membership in a production cooperative is typically limited to physical persons. This is not so in service (“consumer”) cooperatives, where members do not work in the cooperative and thus legal persons may join as members. Although household plots play a crucial role in agricultural production in all CIS countries and due to their smallness are ideal candidates for joining a service cooperative, only the Russian cooperative law mentions them explicitly as a membership category. In all other countries, household plots are relegated to the old Soviet-style law of rural cooperative societies, which was originally designed during the Soviet era to address the specific needs of household plots. This may lead to a legal attitude that focuses only on commercially oriented peasant farms as “agricultural producers” eligible for membership in a service cooperative. On no account should the role of household plots in agricultural production be ignored, and they must always be regarded as legitimate candidates for full membership in service cooperatives. 189 Agricultural Cooperatives in Transition Countries Member Participation in Cooperative Activity and in Labor Input Participation of members in the activity of their cooperative is a basic principle and it is indeed incorporated in the cooperative laws of most CIS countries (see Table 11.5; other countries are silent on this issue). Contribution of member labor to the cooperative, i.e., an obligation to work in the cooperative, is properly limited to production cooperatives, which are totally based on member labor. Service (“consumer”) cooperatives are usually based on hired labor, although members may also work in such cooperatives. Transactions with Members and Non-Members Cooperatives are in principle conceived to serve their members’ interests. Transactions with non-members are therefore regarded as an exception. However, it is not always possible to avoid transactions with non-members, as the membership base may be too narrow to allow growth and development. This is the main motive that pushes service cooperatives to engage in transactions with non-members. In production cooperatives, the situation is somewhat different: production cooperatives employ members’ labor to produce for the market, not for the members themselves, and their sales activities are automatically conducted with non-members. The attitude toward transactions with non-members is one of the features that differentiate between service and production cooperatives. The European approach is to treat transactions with members as “cooperative transactions” that do not generate profit and the transactions with non-members as profit-generating “commercial transactions” (Henry, 2012, pp. 23, 38). 22 This approach may have influenced (perhaps indirectly) the cooperative law in some CIS countries, where profit earned on transactions with non-members cannot be distributed to members. Western cooperative literature usually cautions against allowing transactions with non-members to spread too much and emphasizes the primacy of transactions with members, although cooperatives laws in Europe and EU Regulations somewhat paradoxically allow unlimited business with nonmembers (Henry, 2012, p. 12, note 35). The treatment of this issue in CIS cooperative legislation is patchy. Kazakhstan, Tajikistan, and Azerbaijan allow transactions with non-members. Moldova and Russia impose a cap of 50% of sales on transactions with non-members: if this cap is exceeded, the cooperative may lose its status and all associated preferences. Other countries are usually silent on this 22 In Latin American legislation (including the 2008 Ley marco para las cooperativas de America Latina), the transactions between members and their cooperative are qualified as acto cooperativa (cooperative acts) as opposed to commercial acts (Henry, 2012, p. 38). 190 11. Cooperatives in CIS and Georgia: Overview of Legislation issue and it is mainly discussed in the context of taxation: tax preferences may be allowed on transactions with members, but not on transactions with nonmembers. Taxation of Cooperatives Tax inspectors in all CIS countries are bound by the language of the Tax Code. Cooperative law can outline conceptual principles and suggest taxation guidelines, but ultimately any tax ruling is based on the Tax Code. Thus, the 2005 Law of Cooperatives in Kyrgyzstan contains a blanket statement deferring all tax-related decisions for cooperatives to the Tax Code (Article 32). Taxation of cooperatives involves two distinct issues: (a) value added tax (VAT) and (b) tax on profits at the level of the cooperative. In both instances, the Western approach to cooperative taxation is guided by the view that cooperatives are “the mandatories of their members” (Henry, 2012, p. 71), i.e., they “act on behalf of their members as their agents”: Because of the close involvement of the members in the decisionmaking processes in the cooperative and because of the special nature of the transaction between the members and their cooperative, cooperatives can be seen as the executing agents of the members. This view suggests that transactions between cooperatives and their members should be exempt from both VAT and profit tax. The burden of taxation should shift from the cooperative (“the agent”) to the members as the principal. Value Added Tax (VAT) Cooperatives as legal bodies charge VAT on all their transactions. This has no major effect on legal bodies doing business with the cooperative – such as registered peasant farms, other cooperatives, or agricultural enterprises. In accordance with universal VAT procedures, these legal bodies simply offset the VAT charged by the cooperative against their own cumulative VAT obligations, while the cooperative offsets the VAT charged by its clients against its own cumulative VAT obligations. In this way, only the last incremental amount of VAT is effectively paid to the VAT authorities. Yet smallholders who are not registered VAT payers find themselves at a disadvantage. On the one hand, they cannot offset the VAT charged by the cooperative on their transactions against anything, and this increases their costs. On the other hand, the cooperative is obliged to calculate the full amount of VAT on any transaction with the 191 Agricultural Cooperatives in Transition Countries smallholders and becomes liable to the VAT authorities for this full amount, instead of just the incremental amount on the last link in a chain of transactions. The cooperative will naturally attempt to charge this extra “cost” back to the smallholder, paying less than the original invoice amount for the product received. The smallholder is thus at a clear disadvantage when selling his products to a cooperative (or actually any legal body) or when buying supplies from a cooperative. A smallholder would be better off by dealing with a small private intermediary (supplier or trader) who does not charge VAT rather than with the cooperative. Cooperative lobbyists in CIS advocate that all transactions with members should be exempt from VAT. The Moldova Tax Code has maintained exemption of agricultural service cooperatives from VAT on transactions with members for many years (see 2013 version, Part III, Ch. 4, art. 103(1): 22). The 2009 Tax Code of Kyrgyzstan similarly exempts agricultural service cooperatives from VAT on transactions with members (Article 239). This is also the attitude of the developers of the 2013 Law of Cooperatives in Tajikistan, who drafted an appropriate amendment to the Tax Code. In other countries, there are no sweeping exemptions of cooperatives from VAT. Partial solutions have been attempted in Kazakhstan, where service cooperatives enjoy preferential terms paying only 30% of the general VAT rate, and in Ukraine, where the novel concept of Agricultural VAT allows agricultural cooperatives (alongside with all agricultural producers) to accumulate their VAT obligations for internal development purposes instead of transferring them to the state. These solutions are effective for legal bodies, but not for smallholders. The VAT bias against smallholders can be resolved only by unambiguous legislation that exempts from VAT all transactions with members. Tax on Profits Regardless of the formal status of cooperatives as non-commercial or nonprofit organizations, their financial reports may show an accounting profit at the level of revenues and expenses. This accounting profit is taxable in principle. Thus, although the Ukrainian law of cooperatives (2013) explicitly recognizes cooperatives as non-profit entities, this conception has not yet fully penetrated the Tax Code. The accounting profit is called “surplus” in Western cooperative accounting, as the term “profit” is deemed inappropriate for “non-profit” organizations. Surplus is created because the cooperative may have initially underpaid its members for products delivered (expenses too low) or overcharged them for inputs supplied (revenues too high). If the financial report shows an accounting loss (i.e., “deficit” or negative “surplus”), this indicates that the cooperative overpaid the members for the products delivered during the reporting 192 11. Cooperatives in CIS and Georgia: Overview of Legislation period or undercharged for input supplies. In effect, the accounting profit or loss (surplus or deficit) is the result of internal pricing decisions within the cooperative, and not profit in the usual economic sense of the term. Cooperatives do not know in advance, at the time of the actual transaction, how much to pay to members for product deliveries and how much to charge for input supplies and other services. Financial settlements with members are handled in two waves: the first-wave payments and charges are in the nature of an initial advance, and the final settlement is made at the end of the period, when the financial statements have been prepared on the basis of actual costs and revenues, including all overhead and management costs. As a result, a service cooperative usually presents a financial statement that shows a positive surplus (accounting profit) or a deficit (accounting loss) according to the scheme in Table 11.6. Table 11.6. Schematic “profit and loss” statement of a service cooperative Marketing cooperative Revenues from sale of members’ products to third parties Costs: First-wave payments to members Operating costs of the cooperative Gross income (surplus/deficit) Supply cooperative Revenues: first-wave payments from members Costs: Paid to suppliers Operating costs of the cooperative Gross income (surplus/deficit) Gross income (^hoh^ in Russian) represents the surplus or deficit that is further allocated by three channels:23 1) Allocation to the cooperative reserve fund or other capital funds (“retention of earnings” in standard accounting terminology). 2) Distribution to members in proportion to their share contribution to the cooperative capital (“dividends” in standard Western terminology; iZ_\u_ \uieZlu in Russian). 3) Patronage refunds (dhhi_jZlb\gu_ \uieZlu) in proportion to the members’ use of cooperative services (i.e., essentially in proportion to firstwave payments to the members). The sum of the three amounts distributed to members is equal to gross income. Patronage refunds are determined as the difference between gross income and the first two allocations (Table 11.7). 23 This income distribution scheme is outlined in detail in the 2013 Tajik Law of Cooperatives (Article 36) and more concisely in the 2005 Kyrgyz Law of Cooperatives (Article 28) or the 2012 Ukrainian Law of Cooperatives (Article 9(5)). 193 Agricultural Cooperatives in Transition Countries Table 11.7. Allocation of profit in a service cooperative Gross income (surplus/deficit): Less allocation to reserve fund and other obligatory funds Less distribution in proportion to share contribution (iZ_\u_ \uieZlu, “dividends”) Difference available for distribution as patronage refunds (dhhi_jZlb\gu_ \uieZlu) Conventional interpretation of the tax code will require the cooperative to pay tax on the full gross income at applicable rates. Recognition of the special nature of patronage refunds in cooperatives (as second-wave adjustment of initial over- or under-payment to members) suggests that this component of gross income should not be taxable. Furthermore, the U.S. tax code recognizes “dividends” paid to members in agricultural cooperatives (but not other cooperatives) as non-taxable at the cooperative level, i.e., exempt from withholding taxes (Autry and Hall, 2009). The Dutch principles of the taxation of cooperatives also exempt all distributions to members (“dividends”) from profit tax under the so-called “participation exemption” (Dutch Cooperatives, undated). If these tax principles are adopted, the cooperative will be required to pay tax only on the share of gross income retained in reserve fund and other capital funds. The amount retained in the reserve fund and other capital funds will be shown net after deduction of the appropriate taxes. Recognizing the need to exempt patronage refunds from taxation, the 2013 Law of Cooperatives in Tajikistan introduced an important provision in Art. 36(3): Payments to cooperative members in accordance with their participation in cooperative activities … are treated as expenses. This essentially implies that patronage refunds are deducted from revenues as part of operating costs in Table 11.7 and do not figure as part of taxable Gross Income. We argue that the same treatment should be applied to the “dividend” component (following the U.S. example). The 2012 Ukrainian Law of Cooperatives classifies service cooperatives as non-profit organizations (Article 9(1)) and similarly to the Tajik law explicitly excludes receipts from sale of members’ products from calculation of accounting profit (Article 9(4)). However, these attitudes have not been fully absorbed into the Ukrainian Tax Code. As of January 2013, the profit tax for service cooperatives is assessed on net income after subtracting all “mandatory and dividend payments,” meaning that the profit tax is assessed on the net income available for distribution as patronage funds – the last component in Table 11.7. 194 11. Cooperatives in CIS and Georgia: Overview of Legislation This approach still subjects farmers who join cooperatives to double taxation, but the tax base has been reduced considerably. 24 Tax codes in CIS often allow extensive concessions to the category of agricultural producers. Thus, in Ukraine, agricultural producers have been subject to a so-called special tax regime since 1998, which leaves them virtually untaxed. Agricultural producers are entities that mostly engage in primary agricultural production so that service cooperatives (including processors) are generally not regarded as agricultural producers and do not enjoy the various exemptions allowed to producers. This is often cited as a strong disincentive for farmers to join a cooperative: as independent producers they enjoy a host of tax exemptions, which are lost once they become members of a cooperative. A possible solution to this dilemma is to explicitly recognize service cooperatives as agricultural producers. Thus, in Kazakhstan, the current tax code does not envisage any special tax concessions for cooperatives, but it explicitly puts agricultural service cooperatives in one category with other agricultural producers. As such, service cooperatives in Kazakhstan are entitled to follow a highly simplified tax-return system, with minimum accounting requirements, and furthermore they pay only 30% of the standard tax rate on all basic taxes (primarily VAT and corporate income tax, as well as land tax, land lease payments to the state, property tax, social tax, vehicle tax). In Azerbaijan, the appropriate provision is incorporated directly in the new Law of Agricultural Cooperation. According to Article 9.6, “existing tax preferences … provided in law for agricultural producers are also applicable to cooperatives created by agricultural producers.” Although this approach eliminates some of the blatant tax distortions for service cooperatives, possible distortions still arise for operators of household plots. As physical persons, they only pay personal income tax and their agricultural activities are exempt from taxes. If they join a service cooperative, the cooperative – a legal entity – will be obligated to calculate VAT on their transactions and to deduct profit tax from their share of income earned through the cooperative Registration Requirements for Cooperatives Cooperatives are legal bodies and as such require registration, either as part of general registration of legal bodies according to Civil Code or as a special registration procedure specified in the country’s law of cooperatives. The ILO guidelines for cooperative legislation state that, “the establishment of a speedy 24 A bill to amend the Ukrainian Tax Code so that agricultural service cooperatives are considered nonprofit entities in the Tax Code, and not only in the Law of Cooperatives, was introduced into the Ukrainian Rada in March 2012 by the Communist parliamentary faction, but has not been passed. 195 Agricultural Cooperatives in Transition Countries and impartial registration procedure is a first step by the state towards facilitating the development of a genuine cooperative system” (Henry, 2012, p. 69). The registration requirements in CIS legislation are usually formulated in a muted general language. Thus, the Azerbaijan Law of Cooperation (1996) devotes a single sentence to the registration of cooperatives: Article 9. State registration of a cooperative A cooperative undergoes state registration in accordance with the laws of the Republic of Azerbaijan and is granted the status of legal person from the date of registration. Similar laconic language is used for registration in the cooperative laws of other CIS countries (e.g., Russia, Kazakhstan). The Civil Code of Belarus – a highly authoritarian and centralist country – goes even further and explicitly states that … refusal to register a legal person from motives of inadequacy is not allowed… Refusal to register by state registration organs may be appealed through the courts (art. 47.1). The 2005 cooperative law of Kyrgyzstan similarly states that State registration of a cooperative may be refused only if the legally prescribed creation procedure has not been followed or its foundation documents are inconsistent with Kyrgyz legislation. Refusal to register … or avoidance to register [by the state authority] may be appealed to the courts (art. 10.3) This mild tone adopted in various CIS laws is consistent with the ILO recommendations on registration of cooperatives (Henry, 2012): N …a cooperative must be registered once the conditions laid down in the law are fulfilled (p. 68) N …if prior approval is necessary, the discretionary power of the approving authority must be strictly and effectively limited by law (p. 68) N In no case must the registration procedure hinder people from forming entities in the way that suits them best (p. 69) N registration will be concluded within a short time period; a refusal to register must be justified in writing; in the case of refusal, the founders may appeal before a court, which should give a decision within a brief time period (p. 70) 196 11. Cooperatives in CIS and Georgia: Overview of Legislation N the fees for the registration and publication must in no case be prohibitive (p. 70) A different approach is found in the new Law of Agricultural Cooperatives (2013) in Georgia. Uniquely among the CIS countries, Georgia N establishes a special state agency, the Agency for the Development of Agricultural Cooperatives within the Ministry of Agriculture, given in law the power to confer or withdraw the status of agricultural cooperative (art. 8); N introduces a two-step registration process for cooperatives: first register as a legal body, then apply to the Agency for recognition as a cooperative (art. 7.2). The Agency has powers to “grant and terminate a status of an agricultural cooperative” (art. 8.5e)), without any explicit requirement to justify its decisions in writing or to allow the injured parties to appeal to the courts. According to the Law on Agricultural Cooperatives (art. 15.2), the rules for granting and termination of the status of an agricultural cooperative were to be specified within 2 months after the Law came into force in July 2013. However, to date (March 2014) no regulation on this crucial issue has been made public. The two-step registration process without clear criteria for the granting and termination of the status of an agricultural cooperative would appear to be inconsistent with the strong recommendations for simplicity and transparency voiced by the ILO (see above). Sources within Georgia25 state that the two registrations are intended for different purposes. Registration as a legal entity is the normal record-keeping listing required in Georgia for legal bodies, including all cooperatives. Registration with the Agency is an optional step to be undertaken if the cooperative would like to participate in government support programs. The authority to grant and terminate the status of “agricultural cooperative” in Georgia represents an effort at quality control, in order to weed out “false cooperatives” which abuse the cooperative name in order to qualify for state aid. This is an important function, as the “sleeping cooperative” phenomenon is fairly widespread in the region (see Chapter 6). On a technical level, we should perhaps also note that the lengthy and detailed discussion of the Agency in articles 8 and 9 is more appropriate for an internal 25 Information provided by the FAO Representation Office in Tbilisi, Georgia (March 2014). 197 Agricultural Cooperatives in Transition Countries ministry document or a government resolution. It looks completely out of place when embedded prominently in a law of cooperatives. News reports in the Georgian press indicate that the government expects the new cooperative law “to stimulate the enlargement of farms” (Georgia Business, 2013). The government also stresses that “irrespective of the size of the land plot contributed by a member to the cooperative – whether 1 ha or 100 ha – all members are equal, each member has one vote.” While the emphasis on the democratic principle of “one man, one vote” is laudable, these statements give the impression that the government officials think strictly in terms of production cooperatives: members are expected to contribute their plots to the cooperative for joint cultivation – instead of requiring the cooperative to provide services to independent smallholders. Georgia’s new law of agricultural cooperatives does not speak explicitly of agglomeration of holdings in production cooperatives or transfer of individually owned land to cooperatives. The views in the media are apparently fostered by the definition of agricultural cooperative in article 6 of the new law, where areas of cooperative activity are listed as “production, processing, packaging, labelling, storage, transportation and marketing of agricultural products”. Lack of clear differentiation between the activities of production and service cooperatives is probably responsible for the traditional identification of any cooperative with “production cooperative”. It is surprising that donor advice did not emphasize the need to distinguish clearly between the two types of cooperatives and to refocus the attention on service cooperatives, rather than production cooperatives. Conclusion The CIS countries have established an impressive array of cooperativeoriented laws. Most countries explicitly recognize the ICA principles of cooperation, but difficulties and lacunae remain with regard to practical differentiation between production and service cooperatives as well as taxation of cooperatives. The specific mix of agricultural cooperatives in CIS requires further work on both the legal level and the public awareness level to clearly differentiate between production and service cooperatives. Education efforts by the country governments and the donor community are needed to explain the advantages of the service cooperative model and its appropriateness for the CIS farming population. Without acceptance by an enlightened rural population, there is little chance for agricultural service cooperatives to take root. As part of the legal efforts, the separate legislation for “rural consumer societies” inherited from the Soviet era should be abolished, as these societies can be easily incorporated in 198 11. Cooperatives in CIS and Georgia: Overview of Legislation general cooperative legislation. However, this approach will require political will to overcome the lobbying power still retained by old bureaucratic structures. Attention to taxation legislation is a highly practical area that requires immediate attention. For cooperatives to become sustainable, it is essential to adopt the Western principles and exempt transactions with members and all distributions to members from taxation at the cooperative level. Only the portion of surplus retained in the cooperative equity for growth and expansion may be taxed. A third issue, which is not related to legislation, concerns access to credit. It is usually recognized that start-up cooperatives may require seed money to launch their operations and establish an infrastructure base. These funds may come from the government in the form of reduced interest rate loans through financial institutions or from donors in the form of direct grants of money or assets. To avoid wasteful distribution of subsidized credit, cooperatives should be required to provide sufficient matching funds before getting cheap loans and entitlement to credit should be strictly linked to performance: only active cooperatives with valid business operations should be entitled to receive subsidized loans or other grants. The approach of the Georgian government (as outlined above by the FAO Representation Office in Georgia) could represent a novel approach to provide vital investment support to true agricultural service cooperatives, while weeding out false cooperatives which have registered themselves purely to take advantage of occasional government support. As to donor support, it is important to change the donor mindset: the traditional short-term horizons of one or two years are not constructive for development purposes. It is essential to develop programs ensuring sustained long-term support to cooperatives, such as the programs initiated by Heifer Ukraine. It may also be useful to focus on establishing links between agricultural cooperatives, as suppliers of raw materials, and private processors, as users of raw materials. A good example of such an alliance is provided by Danone Ukraine: Danone reaches out to agricultural service cooperatives as sources of supply of quality milk for its dairy operations, while ensuring long-term cash inflows for cooperatives through its milk purchasing commitments. In summary, development of public awareness, attention to taxation issues, and creation of sustainable forms of financial support are the main issues that need to be considered in the context of cooperative development in CIS. 199 Agricultural Cooperatives in Transition Countries References Autry C. and Hall, R. (2009). The Law of Cooperatives, American Bar Association: Business Law Section, Chicago, IL. Cobia, D., ed. (1989). Cooperatives in Agriculture, Prentice Hall, Englewood Cliffs, NJ. Compendium (2016). Legislation governing cooperatives in former Soviet Union Countries, in: Comparative Analysis of Cooperative Legislation in Post-Soviet Countries, FAO/REU, Budapest. http://www.fao.org/europe/resources/compendium/en/ Dutch Cooperative (undated). Memorandum: Taxation of the Dutch Cooperative, Blue Clue Tax Solutions, The Hague. http://www.blueclue.nl/images/brochures/en/blue%20clue%20%20taxation%20of%20the%20dutch%20cooperative%20v1.0.pdf Epshtein, D. (1993). “Cooperative movement in the Soviet Union: History and future prospects,” in: C. Csaki and Y. Kislev, Agricultural Cooperatives in Transition, Westview Press, Boulder, pp. 291-300. Georgia Business (2013). Business Gruziya, 9 August 2013. http://bizzone.info/agriculture/2013/1376075873.php. Golovina, S., Nilsson, J., and Wolz, A. (2012). “The development of agricultural production cooperatives in Russia,” Journal of Rural Cooperation, 40(1): 4459. Henry, H. (2012). Guidelines for Cooperative Legislation, 3rd revised edition, International Labor Organization, Geneva. ICA (2013). “Co-operative identity, values & principles,” International Cooperative Alliance. http://ica.coop/en/what-co-op/co-operative-identityvalues-principles. Lenin, V.I. (1923). On Cooperation [in Russian], in: Collected works of V. I. Lenin, 5th ed., vol. 45, pp. 369-377. http://revarchiv.narod.ru/vladimilitch/lenin45/cooperation.html Osipov, N.T. (1960). “Lenin’s Cooperative Plan and Some Issues in Current Development of Kolkhozes” [in Russian], Pravovedenie, No. 2, pp. 73-82. http://www.law.edu.ru/article/article.asp?articleID=1128478 Serova, E. (1991). Agricultural Cooperation in the USSR [in Russian], Moscow: Agropromizdat, pp. 44-57. 200