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A.Reed (2) Privatisation and Agrarian Reform in Russia.
Privatisation and Agrarian Reform in Russia.
(PART 2)
Electronic Conference Contribution
by
Andrew N. Reed P.Ag.
U.K./Canada
4.2 Availability of Relevant know-how.
Attempts to push technical decision-making down to the individual
agricultural enterprise level creates a need for the widespread dissemination
of information about alternatives from which those choices can be made.
The need to provide a smogasboard of options and allow Óself-serviceÔ on
the part of the individual enterprise when it comes to making decisions
whether to adopt a particular alternative cannot be emphasised enough.
This is a major departure from recent practice and will therefore encounter
resistance. Resistance to the provision of the information on which well
informed choices can be based can be expected because throughout the
Soviet period the powerful and liberating potential of information was fully
appreciated and its dissemination was tightly controlled as a consequence.
Choices between technologies were taken centrally and implementation of
these choices was left to an array of specialists at the individual enterprise
level. Perhaps more surprisingly, it will also be resisted by potential users
who are unaccustomed to the responsibilities associated making their own
decisions.
In market economies, the structure of agriculture dictates that producers
generally have little or know say in determining the prices they receive for
their products. They are frequently described as Óprice takersÔ in the
market. As such the only route to profitability available to them is
reduction of costs per unit of output. Brought up as have been in a cost-plus
pricing environment the potential for profitability via cost reduction is a
revelation to most farm enterprise managers.
Once this conceptual barrier has been broken, it is relatively simple to start
introducing farm enterprise managers to lower cost production strategies.
Unfortunately the enterprises often have exceptionally limited resources and
this dictates a low technology approach emphasising know-how and
community wide mobilisation which goes very much against the Soviet high
technology, ÓeverybodyÒs a specialistÔ style.
Ultimately there is a great deal of merit in a low or appropriate technology
focus: there are tremendous opportunities for improvements in productivity
and efficiency via the implementation of minimal or low cost changes in Óthe
way things are doneÔ. Ultimately this is beneficial for the enterprise as a
whole because it fosters self-reliance and discourages shifting the dependence
of the farm sector from the local administration to various well meaning
foreign organisations offering high-tech ÔsolutionsÔ. The nominal cost of
ÓcreditÔ and a complete absence of project cost-benefit analysis during the
Soviet period makes farm enterprise managers very susceptible to new
ÓtoysÔ, but much less adept at changing the more mundane practices,
although the latter are likely to have a much greater impact on the economic
well being of the enterprise.
In most countries where ÓdevelopmentÔ is considered desirable, the existing
technology is the product of the prevailing economics. In these
circumstances, well-intentioned foreign assistance efforts designed to
convince decision makers that other people in different economic
circumstances know better are almost invariably doomed to failure. The
lesson of induced innovation theory (see Appendix 1) for those in the
technical assistance business is therefore usually a painful one.
In Russia in the post-Peristroika period, however, just the opposite situation
exists: rapid changes in the economic environment have rendered the
entrenched technology non-viable. The systemic bias against technical
change, distortions in the economic signals and lack of awareness of
alternative production strategies combine to impede the necessary
adjustments in Óthe way things are doneÔ More widespread awareness of
low cost production strategies is now urgently required in the Russian
context.
4.3 Independent Decision Making Ability
Privatisation programmes such as the Nizhny Novgorod model tend to
increase the number of potential economic decision makers in the sector
while avoiding the mistake of imposing a bias on the organisation form they
will take. Induced innovation theory, with its emphasis on a bottom-up
process suggests that this is indeed a very positive development. There is,
however, one important caveat: in order to realise their potential to change
Óthe way things are doneÔ the burgeoning decision makers must be in a
position to make choices among various options.
This is a substantial departure from the practice of the Soviet period.
Traditionally the majority of decisions regarding the product and
technology mix on agricultural enterprises were taken elsewhere by the
various levels of the administration. At present, although there has been
some deregulation of agricultural production the administrative
infrastructure continues to hold a lot of the strings, particularly when it
comes to the allocation of inputs such as fuel, credit, seeds, breeding stock
and so on.
>From the Ótop downÔ perspective of the administration of course any
increase in the number of agricultural enterprises is a bad thing. The scale of
Soviet agricultural enterprises stems from the efficiency gains in a
command-and-control economy from having a relatively small number of
enterprises to deal with.
If the state apparatus continues to operate in command-and-control mode a
larger number of potential economic agents at the bottom of the hierarchy is
at best irrelevant, and probably counterproductive. In other words, the
question is not only the creation of potential decision makers, but also the
provision of an environment in which they can make decisions, experiment
and innovate.
As a consequence of the Soviet period, agricultural workers were only able
to exercise any initiative and make their own decisions regarding production
in their private plots. It is significant therefore that it is in private plot
production that they do husband their soil and nutrient resources, made
maximal use of available labour, demonstrate considerable ingenuity in
preserving and storing output for winter consumption, and entrepreneurship
in the marketing or barter of surpluses.
4.4 Stable Policy Environment
The tendency of agricultural enterprise managers in Russia who do have
some control over their product and technology mix to favour the short term
over the long term is understandable. Agriculture has been the victim of
shifting political winds for as long as anybody currently active in the sector
can remember. There is probably currently a higher level of uncertainty
than ever regarding the future policy direction.
The nature of agriculture production makes a degree of stability in policy
even more important than in other branches. Agricultural production is
heavily reliant on natural processes, and it takes time for natural processes
to operate. Gestation periods and growing seasons mean that production
cannot be continuously adjusted in response to changes in the economic
signals. Once a crop is planted, the enterprise has committed itself. In the
absence of capital, livestock producers have no alternative but to substitute
time in order to increase production in the medium and longer term. Young
stock in excess of the replacement rate must be retained for breeding
purposes, reducing cash flow in the short term. Orchards have even longer
life cycles. The slow dissemination of information regarding government
initiatives in the agricultural sector and the frequent changes to those
initiatives therefore tends to mitigate the risk taking which is implicit in
agricultural production.
The stability of the policy environment is also a prerequisite for sustainable
agricultural practices: in the absence of some assurance that rights to
develop a particular piece of land will be respected in the medium and longer
term is a major impediment to resource stewardship. Initiatives to privatise
land are less than enthusiastically received when those entitled to it see no
opportunity to utilise it, are concerned that their individual initiative might
cause an adverse reaction in the community in the short term, and that the
political will to continue reform in the medium term is doubtful.
A stable policy environment is a crucial element in fostering co-operation at
all levels of the economy. Short term horizons encourage cheating on the
system{6}, and the uncertainty to which the agricultural sector has recently
been subject goes a long way toward explaining the breakdown in labour
discipline, respect for property and the rule of law in the countryside in the
post-Peristroika era.
4.4 Recourse to Legal Protection
The Órule of lawÔ is a nation-wide concern at the present time. By its very
nature the agricultural economy is both particularly susceptible to lawless
behaviour and particularly difficult to place. Restoration of community
cohesion offers the best protection against vandalism, arson and theft.
However as has been pointed out previously, the reforms tend to disrupt
community cohesion, the rural economy is reeling from the psychological
impacts of Peristroika, and the unstable policy environment has contributed
to a widespread Óevery man for himselfÔ attitude.
5 The Exaggerated Impact of ÓStand AloneÔ Privatisation in Agrarian
Reform
The main justifications for privatisation are usually given as improved work
ethic on the part of owners, enhanced probability that environmentally
sustainable production practices will be adopted, a necessary precondition
for the mortgaging of land and the need to create a mechanism by means of
which assets can be aggregated in the hands of those most able to make
productive use of them.
Each of these is dealt with briefly in turn:
5.1 Privatisation and the Work Ethic
In any enterprise, improvements in efficiency stem directly from more
effective deployment of resources. More effective deployment of human
resources lies at the heart of the substantial improvements in the
competitiveness of western firms during the last two decades. All sorts of
jargon such as Óre-engineeringÔ, ÓempowermentÔ and Óright-sizingÔ have
been invented to say this in a more obscure way.
Successful enterprises everywhere have recognised the importance of the
individual and have acted to harness individual potential for the
achievement of enterprise objectives. In the drive towards enterprise
efficiency (or reduced X-inefficiency) enterprises have recognised that
workers respond well to greater responsibility, appreciate and take
advantage of opportunities to increase their range and level of skills, respond
more to the example of successful peers than the demands of superiors and
officials, need to feel appreciated and respected (again primarily by their
peers), and have the greatest self-interest in, and capacity for adopting, Ónew
ways of doing thingsÔ which enhance effectiveness. Conversely, stress levels
are highest among employees who feel that they have no say in their
deployment{7}.
Faced as it is with a dearth of capital, RussiaÒs agricultural sector
desperately needs to substitute labour for capital, both in the form of brain
power and physical exertion. After a concerted effort throughout the Soviet
period to eliminate local initiative and remove decision-making
responsibility from the countryside, it will be difficult to reverse these trends.
Hence while the need is great, the potential, in the short term, is low.
The extreme functional specialisation which was characteristic of agriculture
in the Soviet period alienates workers from their task by eliminating any
sense of responsibility for the final product. Extreme functional
specialisation anywhere means that there is always someone else to blame if
things do not turn out properly. Specialisation also goes a long way toward
turning part time work into full time work. This is counterproductive for a
number of reasons. There are few things more onerous than boredom: time
goes very slowly, productivity is low, there is a great temptation to get into
mischief, and a complete absence of job satisfaction. Part-time and
ineffective work creates a demand for more labour × and labour shortages
are a frequent complaint of enterprise managers. High quality agricultural
labour is increasingly scarce, but most of the short fall is artificial.
Improved work ethic on the part of owners is a readily observed short-term
consequence of privatisation. However in the absence of meaningful
economic incentives the improved work ethic is more a consequence of the
feeling that there is an opportunity for a fresh start than it is attributable to
ownership per se.
The problem of motivation is not unique to Russian agricultural enterprises.
In any organisation × whether big business, big government or big farm -
motivation of the work force is a major problem. Where it has been able to
solve this problem, collective agriculture has proved very competitive in
Canada. Private farming also remains successful where the small number of
individuals involved are motivated and there are a broad array of external
support services available, each of which is provided on a competitive basis.
Although there is considerable stigma attached to ÓcorporateÔ agriculture in
some quarters, its economic success is self evident where either the
motivational challenge has been met, and/or where actively abetted by
government policy notwithstanding the fact that employees are not owners.
It is frequently the case that agricultural land is worked by those who do
not own it. Vast areas of land in market economies are rented or leased
from land owners and farmed effectively and sustainably. Usually the rental
arrangement involves a negotiation which enables the farmer to capture
some of the longer term benefit of sustainable land use practices, while the
landlord restricts his claim to the speculative appreciation component.
In western market economies there is a concerted effort underway to have
employees act as if they are owners. Incentive compensation of employees
tied to the shareholder value of the enterprise in which they work is one
means of achieving this end. In the case of publicly held companies, this
sometimes involves an ownership stake in the form of shares. Among the
chief benefits of this ownership ethos is the need for much reduced levels of
supervision.
Absent a leader who is able to take advantage of privatisation to enforce a
change in the work ethic there is considerable risk that bad practices will
reassert themselves on the larger enterprises. In the absence of an economic
return to the individual for the time invested in the new enterprise in the
form of wages and for the contribution of their asset shares in the form of
rental payments serious exertion is likely to be reserved for private sector
activity. Asset shares may be withdrawn and reallocated, either to the
private Ófermerski khozaistvoÔ sector or to neighbouring enterprises.
5.2 Privatisation and Sustainable Land Management
Sustainability of agricultural systems is often thought of in terms of the
relationship between production practices and the productive capacity of the
underlying physical resources. Practices which impair the productive
potential of the physical resources on which agriculture depends are termed
ÓunsustainableÔ while those which maintain or enhance the productive
potential of the environment are labelled ÓsustainableÔ. This is
unfortunately an oversimplification, as will be explained in what follows.
Ownership is considered to bias the selection of agricultural production
technologies from among the broad array of possibilities in favour of those
which are sustainable. The superiority of ownership over tenancy in this
regard was emphasised by Arthur Young (1741-1820), an English writer on
agriculture, when he wrote ÓGive a man the secure possession of bleak rock
and he will turn it into a garden; give him a nine yearÒs lease on a garden
and he will turn it into a desertÔ.
As Viktor Sheveluka, a Communist Deputy in the State Duma, made the
valid point that Óthe form of ownership (in agriculture) alone cannot play a
decisive role in increasing the effectiveness of production.Ô He is clearly
aware that there is a link between ownership, resource stewardship and
economic viability, but is hard pressed to clarify this relationship
{Shevelukha 1995}.
In a subsistence economy where producers are indefinitely dependent solely
on the long term productivity of local resources, subsistence exploitation of
those resources occurs irrespective of the form of ownership. Subsistence
agriculture is almost by definition sustainable because the future survival of
the community involved depends on maintaining the long term productive
potential of the resource base.
Private ownership of land in the absence of external economic incentives to
produce would precipitate a widespread regression to subsistence
agriculture. Under these circumstances, therefore, sustainable agriculture
would be practised irrespective of the ownership status.
ÓSustainabilityÔ problems arise when there is pressure or incentive to
produce a surplus from outside the enterprise. In the absence of clearly
defined ownership there is an inherent temptation for individuals or the
collective to abuse common resources. This temptation, in the context of the
right to pasture livestock on common grazing land, was discussed by
Garnett Hardin {1969} in his paper ÓThe Tragedy of the CommonsÔ.
In market economies this exploitation of common resources such as water
and air occurs in the guise of the externalities problem better known as
pollution. The depletion of North Atlantic cod stocks, over-grazing of
National Forest lands in the U.S.A. and the destruction of the Brazilian rain
forest are just three current examples of resource Óover-exploitation ×
modern examples of the ÓTragedy of the CommonsÔ which are abetted by
government policy and compounded by lack of clear ownership of the
resources in question
In the Soviet period, in which surplus value was Ósnatched away by a
repressive regimeÔ state ownership of land did not produce the desired
results in terms of the stewardship of agricultural resources {Shevelukha
1995}. In a subsequent book ÓLiving within LimitsÔ Hardin extended the
ÓTragedy of the CommonsÔ argument to the Soviet Union whole. He
observes that MarxÒs dictum ÓFrom each according to his abilities, to each
according to his needs!Ô (ironically) owed a great deal to religion in general
and Christianity in particular, but made for very poor economics. In fact,
when it was written in 1875 its economic pretensions had already by
discredited 40 years previously {Hardin 1993 p. 216}. In essence a Marxist-
based economy allows an individual to privatise his needs while
commonising his ÓabilitiesÔ. Inevitably the former are exaggerated and the
latter minimised. It is a logical consequence, rather than a joke, therefore,
that during the Soviet period the populace Ópretended to workÔ while the
sate was able only to Ópretend to pay themÔ.
In the Soviet period, the organisation of agriculture was optimised to
facilitate political command and control. The extraction of the economic
surplus of the rural economy was one of its chief objectives. Pressure to
produce under a Ótaut-planning regime, inevitably led enterprise managers
to resort to unsustainable practices.
In the Soviet period, of course, there is ample evidence of subsistence
agriculture (locally motivated production) involving de factor ownership of
small plots co-existing with larger scale agriculture which was expected to
produce a surplus from state-owned assets motivated more by patriotic
fervour than anything else. The fact that abuse of agricultural resources,
including land, was evident in the collective sector and that agricultural
techniques tended to be more effective and sustainable in the ÓprivateÔ
sector led critics to focus on the organisation of production issue (collective
versus individual, respectively) rather than on the underlying ÓownershipÔ of
the assets involved.
In China, where agricultural reforms have not extended to private ownership
of land, food production has soared as market incentives have replaced local
self-sufficiency as the primary motivating factor. The extent to which the
increased productivity in the short term is being achieved at the expense of
on-going productive potential is currently the subject of considerable debate
{Muldavin 1995}. It is probably a significant indicator of the influence of
time horizons that the ÓcropsÔ with the longest life cycles such as timber
resources are those apparently bearing the burnt of Óover exploitationÔ
while the state ÓownedÔ but household ÓmanagedÔ private plots (which
reflect many of the characteristics of the private plots of rural agricultural
workers in Russia) are less susceptible to environmental degradation.
Russia too could feed itself on the basis of the land currently operated
ÓprivatelyÔ if it had no other choices and if the economic incentives --- the
prices paid by consumers --- were sufficiently high. However there are
choices, including imports and more effective utilisation of land currently
owned by the state.
In a market economy context which includes a land market, sustainability is
a concept which has no meaning outside economics {Reed 1993b}.
Agricultural producers are not interested in Óenvironmentally appropriateÔ
practices advocated by those espousing sustainability for moral or ethical
reasons. Absent contrary influences, an owner would always tend to adopt
those practices which are economically viable and sufficiently replenish the
productive potential of the resource base to permit future viability. This is
the case because his economic self-interest is best served by optimising both
current and future economic viability: insofar as the economic value of
agricultural land is the net present value of future cash flow generated by
that resource it is in his interest to maintain or enhance its value as well as
realising a return on an annual bias.
Abuse of agricultural resources has such serious long term consequences that
common ownership of agricultural land resources in market economies is
intolerable. Ownership by someone able to make decisions regarding the use
of a particular resource, the environmental appropriateness of that use, and
its consequences for the value of the underlying assets is the primary
safeguard against abuse when there is external economic incentive for
production. Under such circumstances erosion of long term productive
potential is counter-productive because it robs only the owner and not
society as a whole.
Whether or not a particular bundle of production practices increases or
decreases sustainability is, at the time it is selected, a function of the decision
makerÒs appreciation of the long and short term economic costs of the
option chosen and his weighting of short vs. long term objectives The
trouble is, of course, that to implement sustainable practices tomorrow, you
have to survive economically today: this is why producer poverty is the
enemy of sustainable land use in all contexts, including Russian agriculture.
One of the key issues in the discussion of sustainability in the context of
market economy agriculture is the extent to which policy intervention by the
state leads producers to favour the short term over the long term in their
economic decisions.
In the post-Peristroika case, insufficient economic incentives and short time
horizons on the part of producers are likely to overwhelm any positive
influence of ownership in determining whether agricultural practices outside
the subsistence-oriented rural economy will be sustainable.
5.3 Privatisation and the Mortgaging of Land.
Mortgaging of agricultural land is only feasible if there is a market for it
which enables a lender to obtain a salvage value from collateral seized in the
case of default. The main attraction of land as collateral is the fact that it is
the ultimate Ófixed assetÔ in the sense that it cannot be surreptitiously
disposed of. However, the market in agricultural land is notoriously
imperfect as demand is effectively limited to those with contiguous plots who
are able to extend their existing operations by acquiring usufruct rights. In
Russia at present, demand for land for agricultural purposes is negligible,
and lack of the equipment and know-how to farm it profitably is the major
constraining factor.
Insofar as the collateral value of agricultural land depends solely on its
underlying agricultural potential it is therefore unlikely in the near term to
be more desirable collateral than something more mobile and more liquid
such as a piece of machinery or livestock. In western market economies, the
collateral value of land frequently stems more from its long term speculative
potential than it does from its agricultural potential. The imperfections of a
market in land for agricultural purposes compounded by the lack of demand
for land for any purpose, therefore seriously limits its usefulness as mortgage
collateral.
Some attempts have been made to infer the underlying value of land for
agriculture from the value of rental contracts, but its collateral value is likely
to be significantly lower than the net present value of in-kind rental
contracts for similar reasons. Hence once again the preoccupation with the
creation of an agricultural land market ahead of an operational market
economy in the countryside seems misplaced.
If there were the potential to convert land to alternative uses, then these
alternative uses would establish a conversion value. This is of course a
familiar problem in urban fringe areas. In Russia it is likely that in the near
term the only active conversion opportunities will be in areas favoured for
dacha development. Such areas are defined by transportation access to
urban population centres. However other alternative uses could be
encourages, such as the long term conversion of marginal agricultural land
to forestry {8} Any such programmes would establish a conversion value for
land which was less location-dependent.
5.4 Privatisation as a Precondition for Asset Re-aggregation.
Privatisation of land and other agricultural assets is a useful step toward the
aggregation of assets in the hands of those best able to generate an economic
return from them. This does however, presuppose that the important
question of economic incentives is addressed. Without a reasonable
probability that the time and investment acquiring assets will be
recompensed it is unlikely that the opportunity costs will be foregone .
Absent the potential to generate a return, agricultural assets will continue to
have no value when utilised in agricultural production. Some land may
have other uses, most obviously for sale for dacha and other types of non-
agricultural development or for conversion into alternative land-uses such as
forestry if superior returns are available from such activities. The
distribution of land ownership rights in advance of a well articulated market
mechanism for the fruits of that land creates the potential for consolidation
of ownership while those rights are obtainable at a devastating discount to
their potential once a market economy begins to function. Under such
circumstances a moratorium on sales seems appropriate. Yet receipt of
ÓrightsÔ which cannot be traded can hardly be considered ÓownershipÔ.
In a modern market economy, Óownership of agricultural land is effectively
restricted to the long term rights to manage and dispose of the real-estate.
The state retains unalienable rights connected with the land including those
of taxation and expropriation. In many cases the state intervenes actively to
restrict the uses to which land can put. As usufruct rights are tradable,
there is every incentive to improve the value of the underlying asset base,
and no incentive whatsoever to diminish the value of those assets. Hence the
situation prevailing in market economy agriculture is much closer to the
situation existing in modern Chinese agriculture, where the state retains
ÓownershipÔ of land, but the management responsibility and usufruct rights
are allocated to individuals in Óin perpetuityÔ than is generally appreciated
{9}. The Chinese experience argues that a robust market economy and
increased reliance on economic incentives is more important than ownership
per se.
Notes:
1. Further information on the Nizhny Novgorod Model is available through
the Internet Home Page accessible via htdp://fadr.msu.ru/farm-cons
2. The implications of this ÓrevolutionÔ are the subject of Peter DruckerÒs
influential book ÓPost-Capitalist Society {1994} (References with dates refer
to the Bibliography)
3. This comprehensive description of Ótechnical changeÔ originated with
Kenneth Boulding {1969}.
4. From an external perspective, although much of the leg-work of the 1917
Revolution was undertaken by the peasants and their soldier offspring, it
was subsequently hijacked by a professional and opportunistic intelligentsia
Stalin allegedly confided to Churchill that collectivisation was even more
devastating than the war {van der Post 1994, p. 135-137}.
5. Imported commodities now available on the Russian market are a
product of successive technical changes in this direction; at present the
domestic products attempting to compete with them are the product of
technical changes oriented in a completely different direction. No wonder
the competition is uneven.
6. This is one area were evolutionary economics sheds considerable light on
the economic process. The study of altruism in biology has heightened
understanding of the role of time in decision making. The Prisoners
Dilemma is a classic example.
See especially Cronin {1994}. There is also a growing literature in
psychiatry suggesting that criminality is marked by a tendency to give
ÓadequateÔ weight to future (possible) punishments relative to the
temptation for present gain. Students of poverty often call attention to the
fact that their subjects, as a group seem to be deficient in their ability to
defer the gratification of their desires to a distant (and hence somewhat
uncertain) future. Modern civilised life demands a stronger future
orientation than may people seem to possess. {Hardin 1993 p. 115).
7. Drucker {1994} & Cooley {1987} elaborate considerably on this theme.
8 Everywhere I have been in Russia, forestry projects all seem to involve
trees at least 30 years old, implying that large scale planting of young trees
petered out toward the end of the Soviet period.
9. See Bray for an extended discussion of this issue.