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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 ñself-serviceò 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 ñprice takersò 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, ñeverybodyðs a specialistò 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 ñthe way things are doneò. 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 òsolutionsò. The nominal cost of ñcreditò and a complete absence of project cost-benefit analysis during the Soviet period makes farm enterprise managers very susceptible to new ñtoysò, 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 ñdevelopmentò 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 ñthe way things are doneò 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 ñthe way things are doneò 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 ñtop downò 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 ñrule of lawò 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 ñevery man for himselfò attitude. 5 The Exaggerated Impact of ñStand Aloneò 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 ñre-engineeringò, ñempowermentò and ñright-sizingò 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, ñnew ways of doing thingsò 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, Russiaðs 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 â 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 â 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 ñcorporateò 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 ñfermerski khozaistvoò 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 ñunsustainableò while those which maintain or enhance the productive potential of the environment are labelled ñsustainableò. 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 ñGive a man the secure possession of bleak rock and he will turn it into a garden; give him a nine yearðs lease on a garden and he will turn it into a desertò. As Viktor Sheveluka, a Communist Deputy in the State Duma, made the valid point that ñthe form of ownership (in agriculture) alone cannot play a decisive role in increasing the effectiveness of production.ò 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. ñSustainabilityò 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 ñThe Tragedy of the Commonsò. 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 ñover-exploitation â modern examples of the ñTragedy of the Commonsò 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 ñsnatched away by a repressive regimeò state ownership of land did not produce the desired results in terms of the stewardship of agricultural resources {Shevelukha 1995}. In a subsequent book ñLiving within Limitsò Hardin extended the ñTragedy of the Commonsò argument to the Soviet Union whole. He observes that Marxðs dictum ñFrom each according to his abilities, to each according to his needs!ò (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 ñabilitiesò. 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 ñpretended to workò while the sate was able only to ñpretend to pay themò. 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 ñtaut-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 ñprivateò sector led critics to focus on the organisation of production issue (collective versus individual, respectively) rather than on the underlying ñownershipò 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 ñcropsò with the longest life cycles such as timber resources are those apparently bearing the burnt of ñover exploitationò while the state ñownedò but household ñmanagedò 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 ñprivatelyò 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 ñenvironmentally appropriateò 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 makerðs 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 ñfixed assetò 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 ñrightsò which cannot be traded can hardly be considered ñownershipò. In a modern market economy, ñownership 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 ñownershipò of land, but the management responsibility and usufruct rights are allocated to individuals in ñin perpetuityò 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 ñrevolutionò are the subject of Peter Druckerðs influential book ñPost-Capitalist Society {1994} (References with dates refer to the Bibliography) 3. This comprehensive description of ñtechnical changeò 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 ñadequateò 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.