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The political economy of private farming in Russia.

Introduction

Since 1991, the Russian agricultural system has experienced significant

change. In the post-Soviet period, these changes have affected food

producers, food processors, and the food trade system. Agrarian and land reforms

have witnessed the reorganization and destatization of agricultural enterprises

(state and collective farms). An offshoot of the reorganization of large farms

has been the creation of a private farming stratum, based upon private

ownership of land. Land privatization in turn has given rise to the

development of a primitive land market. In addition, the privatization of

food processors has been accompanied by a liberalization of the food trade

system and the development of a food wholesale market, in particular

agricultural commodity exchanges. The result of these changes has been a

notable break from the Soviet agricultural system.(1)

Of the many components of Russian agrarian reform, the promotion and

growth of private farms seems to have received the most attention. Despite the

attention that private farming has drawn from scholars, few analysts have

addressed the broader and more important question: what will the future Russian

agricultural system look like and how does private farming fit in? Analyses of

Russian private farms have evolved in two main directions, although the

respective approaches have been more implicit than explicit. The first approach

has emphasized the legal foundations of privatization, concentrating on laws,

decrees, and resolutions that emanate from Moscow regarding land privatization

and private farming. Based on this approach, one set of analysts recently

concluded that "the prospects for growth of peasant farming [are] substantially

more encouraging than at any time in the past three years.... The potential for

very substantial growth of the peasant farming sector in Russia can now be

seen" (Prosterman, Mitchell, Rorem, 1997, 32-33). These authors based their

optimism on Russian President Yeltsin's March 1996 decree which allowed

private farmers to purchase or lease land shares held by members of a

collective or joint stock farm (Rossiyskaya gazeta, March 12, 1996, 5). The

second approach to understanding the development of private farming considers

broader social, demographic, and economic factors, as well as the policy

environment and its effect on private farming.

We see this article serving a twofold purpose. One of the goals is to

examine the assumptions of different approaches and to assess their

utility for understanding the development of private farming in Russia. That

is, at theoretical level, we want to address what factors and considerations

should an analyst emphasize? How much significance should be placed upon

the ability of the center to push private farming forward through decrees and

laws, and to what degree should we be looking at broader sociological,

psychological, and economic influences to understand the farmer movement? In

short, how much influence does the center have in post-Soviet Russia to shape

the countryside? A second goal consists of assessing the development of

private farming in Russia and evaluating the prospects for private farming in

the near to mid-term. Thus, the article seeks to address both theoretical and

substantive issues. These issues are important because they lead directly to

significant policy questions:

1. To what extent can Moscow stimulate and implement rural change?

2. To which sectors of the rural economy should aid and investment be

channeled?

3. Which component of the rural economy -- large farms or smaller

private farms -- will likely provide the resurrection of Russian agriculture?

In order to address these questions we examine several factors that

affect private farming in the sections below. Our analysis is intended to

provide a basis for understanding the prospects for private farming over the

next 5-10 years.

The Legal Environment for Private Farming

Are "the prospects for growth of peasant farming substantially more

encouraging than at any time in the past three years"? In answering this

question many Western analysts continue to pay a great deal of attention to the

legal and legislative in Russia (Prosterman, Rolfes, and Mitchell,

1995). Thus, we will begin with an assessment of how the legal environment

affects private farming. We will argue first, that despite a legal environment

that has become less restrictive and more permissive since 1992, the evidence

is mixed as to the effects of legislation on the development of private farming.

Second, we will argue that the legal and legislative environments are not

sufficient to overcome broader social, economic, and political obstacles.

On the one hand, some evidence suggests that the "right" signals from

the center do exert influence on the calculations of private farmers and

would-be private farmers. For example, the number of private farms grew quite

rapidly during 1992-1993 after Yeltsin's December 1991 decree allowed farm

members to resign from a parent farm and receive land and property shares

upon their exit. Starting in 1992 and during most of 193 the number of newly

created private farms averaged over 10,000 per month. Furthermore, the legal

environments has changed, as have the terms of the debate. Through

presidential decrees, governmental laws, the 1993 Constitution, and the 1994

Civil Code, private property and the right of private land ownership have been

successfully institutionalized (for a review of legislation see Lerman and

Brooks, 1996). The debate is no longer about whether private property should be

allowed, or whether private ownership of land should be permitted. Even the

Communist Party and other parties on the left have officially recognized the

right to private property. The main questions today are how should be private

property be used and what should be the rights of disposal.

On the other hand, surveys among rural residents reveal a deep

ambivalence about directives from the center. For example a survey of private

farmers and farm managers by the All-Russian Center for Public Opinion

(VTsIOM) in early 1994 indicated that 34 percent of private farmers and 47

percent of farm managers felt that Yeltsin's December 1991 decree (On

Urgent Measures for the Implementation of Land Reform) had no effect on

economic activities.(2) When asked about the influence of Yeltsin's October 1993

decree which introduced the right to buy and sell land, 27 percent of private

farmers and 29 percent of farm managers answered that the decree had no

influence (All-Russian, 1997, 74).(3)

There are other reasons to doubt the efficacy of legislation as the main

criterion of reform success. Despite more permissive legal environment since

1991, private farming has stagnated quantitatively and has failed to develop

into a significant contributor to the nation's food supply. There were fewer

private farms in July 1997 than in October 1994, and overall the movement

attained just over one-half the number of farms that were forecast in 1992. To

illustrate: on January 1, 1994 there were 270,000 private farms throughout

Russia. By October of that year the number had increased to 285,000.

However, by January 1, 1997 the number of private farms had decreased to

278,600, before rebounding somewhat to 280,000 by July 1, 1997.(4)

Moreover, since 1992 private farmers have failed to produce more

than 2-3 percent of the nation's gross food supply (measured in ruble prices),

despite possessing 6 percent of agricultural land and as much as 15-17 percent

of the agricultural labor force (Durgin, 1994, 230). Production and sale trends

from private farmers are indicated in Table 1 below.

Table 1

Percentage of Food Production and Food Sales from Private Farmers

in Russia (for selected commodities)

 1992 1993 1994 1995 1996

Grain production

Sugar beet production 2.1 5.2 5.1 5.0 4.9

Sunflower seed production 2.0 3.9 3.5 3.7 3.5

Potato production 5.8 9.9 10.2 14.4 13.1

Vegetable production 0.8 1.0 0.9 0.92 0.93

Meat and poultry production 0.7 1.1 1.6 1.6 1.7

 (dead weight)

Milk production 0.5 1.1 1.5 1.5 1.6

Egg production 0.1 0.2 0.3 0.4 0.4

Milk sales 0.3 0.5 0.5 1.5 1.5

Egg sales NA NA NA 0.4 0.4



Sources: Goskomstat, 1995, 9-11; Goskomstat, 1997b, various pages; and

author's calculations from Goskomstat, 1997c, 297, 299, 300.

Considering the evidence above, we conclude that the legal

environment was undoubtedly important, especially during the early reform years

1991-1992. However, it is not the most important nor the sole factor

exerting influence on the development of the rural private sector. If the legal

environments were the main criterion for reform success, quite different results

would appear than what were portrayed in Table 1. Despite a more permissive

legal environment over time, private farming has stagnated and remained a

marginal food producer. Because private farming results are not what one would

expect if analyzed only from the legal angle, it stands to reason that other

factors are also important in influencing the private farming sector.(5) The

sections below survey factor affecting private farming that are commonly

overlooked by Western analysts.

Rural Demographics

One of the most common mistakes that analysts make is to forget that

reform begins with, is influenced by, and ultimately is constrained by the

base of human capital. In short, people matter. People are all the more

important because of the serious decline in rural stock since 1990. Under the

normal development patterns, over time rural capital replaces rural labor,

allowing the rural labor force to decline. This pattern was evident the

Soviet period, particularly during the last fifty years when the rural labor

declined from 31 million in 1941 to 19.4 million in 1990. The supply of

tractors (to use just one indicator) increased from 500,000 in 1940 to 1.59

million in 1985. However, since 1990 the rural capital stock has plummeted,

as the number of tractors produced has dropped from 143,700 in 1990 to just

over 9,000 in 1996. Similar declines have occurred for trucks, grain

combines, harvesters of all types, milkers, excavators, and bulldozers. Given

the deterioration in equipment and rural capital stock since 1990, if private

farming were to be successful a sufficient demographic base would be

necessary. Specifically, we will see below that the base of human capital

eroded during the Soviet period and continues to do so in the post-Soviet

period. The only way for private farming to be successful is to increase the

stock of equipment and machines, both to substitute for the lost power and to

supply private farmers with needed inputs. The data above, however, showed

that an increase in capital stock has not occurred since reform was begun.

The erosion of the base of human capital has been a long-term

process, spanning several decades, among the rural population in the USSR. Thus,

within the RSFSR alone, the rural population declined by more than 46

percent, from 72 million to 38.9 million between 1939-89. Central Russia was

especially affected, experiencing 42 percent reduction in the rural

population in the non-black zones of Russia between 1959-84 (Pankov, 1985, 20).

We should be clear that a large portion of the rural-urban exodus fit normal

patterns experienced by all nations during industrialization and economic

development. Nonetheless, by the time Brezhnev came to power in 1964 the

Soviet leadership was increasingly concerned about rural outflow. Starting in

March 1965, a series of resolutions and programs were adopted to try to stem

the rural outflow, signaling a policy shift from encouraging rural

out-migration to one that expressed concern about rural depopulation. Despite

party and government efforts that extended for more than 20 years, there is

little evidence to suggest success. During 1979-88, outmigration from rural

areas in the Russian Republic averaged over 422,000 persons a year

(Demograficheskiy ezhegodnik, 1996, 25). Importantly, among the groups most

affected by rural outmigration were the skilled and the young, leaving behind

the unskilled, the elderly and the infirm.

The significance of Soviet rural out-migration patterns was acutely

felt when the agrarian reform program was formulated in 1990 that stressed the

creation of a new stratum of private farmers. In effect, the countryside was

demographically unprepared for agrarian reform. The population base was

not strong enough to support a new stratum of productive farms founded on

private ownership of land. In particular, we can identify several ways in which

Soviet-era demographics affected reform potential in the 1990s.

First, as a result of the departure of the rural young, the age structure

of the rural population became older. The aging of the rural population had an

effect on the potential private farm cohort. Various surveys and studies have

shown that men owerwhelmingly start private farms, and the common

age range for a man to start a private farm is between 20-39 (Goskomstat,

1994, 4; Brooks and Lerman, 1994, 37; Puzanovskiy and Ivantsov, 1994,

63-66). If we consider demographic trends among rural males it is clear that

prospects for private farming were disadvantaged from the beginning. Quite

simply, the cohort of rural males in younger age brackets declined while the

cohort of older males increased. For example, from 1959 to 1987, the number of

rural males aged 10-14 decreased 27 percent, rural males aged 15-19 declined

37 percent, rural males aged 20-24 declined 47 percent, rural males aged

25-29 declined 42 percent, and there were 33 percent fewer rural males aged

30-34 (Population, 1988, 52-53). To put it somewhat differently, if private

farming had been legalized in 1959, a potential cohort aged 20-34 would have

consisted of 6.9 million rural males; by 1987 the actual number of rural males

in that age range was just over 4 million. As a result of declines in the number

of young rural males, in 1996 only about 30 percent of rural men fell within

the most common age range to begin a private farm. The table below shows

higher percentages of older persons: in 1996 28 percent of rural men were 45

or older, as were 38 percent of rural women.

Table 2

Age-Sex Distribution of Rural Population in Russia, 1996 (in percent)

Age (years) Total Rural Rural Rural

 population men Women

 15-19 7.3 8.0 6.6

 20-24 6.1 6.7 5.4

 25-29 5.8 6.0 5.5

 30-34 7.4 8.2 6.7

 35-39 8.1 9.0 7.3

 40-44 6.9 7.6 6.3

 45-49 5.3 5.6 4.9

 50-54 3.2 3.1 3.2

 55-59 6.6 6.3 6.9

 60-84 18.6 13.4 23.3



Note: Numbers have been rounded up

Source: Author's calculations from Demograficheskiy ezhegodnik (1996), 41.

Second, a weak rural demographic base partially explains

governmental efforts to recruit private farmers from social groups other than

state and

collective farm members. In April 1992 the government adopted a program to

attract urban people to the countryside. According to the program, the federal

government would provide a one-time payment to the head of the household

and each family member who relocated to rural areas. Following the

establishment of a federal program to train and educate private farmers in

February

1993 (State Program, 1993, 699-706), the sum was increased from 10,000

rubles for a head of family to 75,000 rubles, and for family members from

2,500 rubles to 15,000 rubles (Rapetskiy, 1993, 31). Thereafter the sum paid

to relocating families was indexed to inflation in subsequent years. Following

the adopting of the 1993 federal training program, similar programs were

adopted for individual oblasts. For example, in August 1993, Prime Minister

Chernomyrdin signed a resolution that stipulated the federal government would

pay the cost of transportation for a family (up to 2 tons per family) to

relocate

into a rural area in Rostov Oblast, one of the most productive agricultural

regions in the country. The resolution also recommended to local governments

to assist new arrivals with housing, fuels, social services, to obtain building

materials, and to acquire land plots and livestock (On Advantages, 1993,

3671-3672).

A third consideration, and related to point two above, is that a weak

rural demographic base explains why an estimated 75 percent of early private

farmers were ex-urbanites. Early in the private farm development process

members of state and collective farms comprised only 5-7 percent of private

farmers, while migrants (largely from the near abroad), "romantics of the rural

way of life," and demobilized military personnel accounted for the remaining

20 percent of private farmers (Sazonov, et al., 1996, 134). However, financial,

tax, and credit policies led most urban residents-turned-farmer to stop their

activities or to continue their farming activities on a nominal basis, using

their

status as a "private farmer" to obtain various advantages (such as exemption

from value added taxes and land taxes and land taxes). By in 1996 it was

estimated that former

urban residents comprised no more than 15 percent of all private farmers, and

only

about 25 percent of that number were actively engaged in agriculture (Sazonov

et al., 1996, 135).

Finally, a weak rural demographic base is a least a partial cause for the

small number of private farms per 1000 persons, as we will examine below.

An older rural population was both more risk averse in attitude and less

physically able to tolerate rural social conditions, the backwardness of the

countryside and the rueling labor demands inherent to private farming.

The Popularity of Private Farming

Flowing from the effects of rural demography, it is important to note that

attempts to develop a private farming stratum have occurred within the

context of rural conservation. This conservatism has been manifest in several

ways. The first way in which rural conservatism has been manifest in the

consistent finding among analysts regarding the relative unpopularity of private

farming as a reform option. It has been clear since at least 1989 that the

rural population was not very enthusiastic about land leasing -- a reform much

more

conservative than private farming. Likewise, surveys and polls since 1990 have

shown the rural population to be at best ambivalent about land reform and

decollectivization (see Wegren, 1994). It has also been clear for years that (1)

the rural population has not embraced risk-taking inherent to private farming,

and (2) that the willingness to engage in private farming has decreased over

time, reflected by a decrease in the number of persons indicating a desire to be

a private farmer (Durgin, 1994, 233).

While it has been clear for several years that the rural population has not

embraced land reform in general or private farming in particular, the

interesting question is why. Some Western writers have blamed farm managers, and

raion and oblast agricultural officials for resistance and outright opposition

to

private farming (see for example Van Atta, 1993). While it is certainly true

that early in the land reform process farm managerial staff and agricultural

officials at the raion and oblast level obstructed land reform and private

farming, their resistance decreased over time. By 1994 farm manager resistance

to

private farming was no longer the main constraint, so much so that by 1994 a

World Bank survey in five Russian oblasts found that 85 percent of farm

managers supported the allocation of land of private farming (Brooks et al,

1996,

33).

That survey, sponsored by the World Bank with cooperation from the

Agrarian Institute in Moscow polled farm managers, farm workers, and

private farmers in 1994. Among the questions asked was "why not become a

private farmers?" Only 6 percent answered due to restrictions on buying and

selling land, and 15 percent cited inadequate land. Instead, economic and

psychological reasons dominated: 74 percent cited insufficient capital, 60

percent mentioned difficulty obtaining farm inputs, and 56 percent responded

that they

were afraid of risk (Brooks et al., 1996, 54).

Results from the World Bank survey were confirmed by an opinion poll

conducted by VTsIOM in 1994. Private farmers and farm managers were asked

the source of the greatest limitation on their work. Both groups

overwhelmingly answered "the government" which in the context of the question

clearly

meant the federal government. Both groups also answered the "tax

inspectorate" as the second most popular answer. Significantly, private farmers

blamed

oblast and raion-level administrations and land committees less than the

federal government and the tax inspectorate. How does the government

"interfere" in agricultural work? In a different question both groups blamed

tax

policy, high taxes, high interest rates, and difficulty obtaining credit as the

worst problems. In addition, neither private farmers nor farm managers were

optimistic about economic conditions in agriculture. In a question that asked

whether economic conditions had changed for the better or for the worse, only

18 percent of private farmers and 5 percent of farm mangers answered for the

better; 45 percent of private farmers and 64 percent of farm managers

responded for the worse (All-Russian, 1994, 73-74).

The second way in which rural conservatism has been evident is through

the lack of decollectivization. Despite clear evidence of rural conservatism

and lack of enthusiasm for private farming, one of the surprises for many

Western analysts has been the lack of spontaneous and complete

decollectivization

in the Russian countryside. For years the assumption had been that given the

opportunity Russian peasants would exit the parent farm in large numbers.

However, reality did not bear out these expectations. The World Bank found

in its 1994 survey that 30 percent of large farms in their five oblast survey

experienced zero departures, while nearly two-thirds had between 1-9 exits

(one to three families) (Brooks et al, 1996, 33). Some analysts still cling to

the

vision (and hope) of massive decollectivization. However, by now it should be

clear that given choices, members of collective farms have "voted with their

feet" and opted to remain within a larger farming enterprise or to intensify

their private plot activities. Responses by farm members to remain within a

collective are due to a variety of reasons including access to social services,

a

hostile economic environment, and because the farm represented not just a

production unit but a social community.

The third way in which rural conservatism has been manifest was

demonstrated during the 1993 and 1995 Duma elections, as well as during the

1996 Presidential elections. These elections demonstrated clearly that rural

voters preferred communist and anti-reform candidates (Clem and Craumer,

1995a, 1995b, 1996; Orttung and Paretskaya, 1996). The electoral evidence

has been so strong and so consistent that analysts who argue that rural opinion

has liberalized and become pro-reform are simply wrong (Reisinger, 1995).

Thus, since 1993 the central question to understanding private farming is not

"what are the legal impediments" but rather "do peasants want to undertake

private farming"?

In answering that question, gross numbers of private farms reveal little

because they often reflect the size of the region's population or the amount of

agricultural and available. In order to circumvent these problems, Table 3

examines the number of private farms per 1000 per persons in each of the

economic regions in European Rusia. The table clearly shows that in all of

the regions of European Russian private farming was not very popular, that is,

one finds an extremely low rate of farms per 1000 persons. At the beginning of

1997, only one region (the Northern Caucasus) had more than four farms per

1000 persons, and only two regions had more than two farms per 1000

persons, suggesting that the difficulties of private farming made this a

relatively

unattractive option in comparison to other food growing alternatives.(6) We may

conclude based on these data that the "saturation" of private farms in the

countryside is rather negligible.

[TABULAR DATA 3 NOT REPRODUCIBLE IN ASCII]

The Land Market

Would-be private farmers have been able to obtain land in several ways.

Persons ways. Persons exiting a parent farm have been able to obtain land and

property shares to use as start-up capital for their private farm. Non-farm

members have been able to obtain land from raion land funds. Both of these

sources are limited, however, in that the quantity of land that can be obtained

is limited to raion-level norms which are usually quite small. In addition,

raion land funds in the south of Russian have been reported to experience

shortages of land for distribution because fewer former collective farms

disbanded during reorganization and due to the demand for land to be used

for private plots, dacha plots, collective fruit and vegetable gardens, and

other

small-scale individual use (land funds are used to distribute land for a variety

of purposes, not just private farming). Therefore, because land allotments have

tended to be small and land is sometimes not available in high demand areas,

the emergence of a land market has become quite important for existing

private farmers to expand land holdings or for beginning farmers to hold land.

As

noted above, land reform legislation established the foundation for a

rudimentary land market, although in reality Russia has a system of land

turnover, not

a genuine land market. Legislation regulating land transactions, namely

presidential decrees in October 1993 and March 1996, allowed land shares to be

purchased and sold, but only with various restrictions. Land shares from

collective enterprises were subject to restrictions on who could obtain land

shares

and land use. Privately owned land such as private plots and private farms may

be bought and sold, but faced restrictions only on land use -- agricultural

land

had to remain in agricultural use. To date the land market in Russia, as it

were,

consists mostly of the sale and purchase of very small plots of land such as

private plots or dacha plots (Wegren, 1997). Transactions involving large

tracts

of farm land are quite rare, as are transactions involving land shares as we

will

see below.

Some analysts see the emerging land market as a key source for the

future development of private farming. For example, Prosterman argues that

"the land share now plays a more central role [in private farmers

obtaining land], while the raion land funds have ceased to be the primary

source

of land for the creation of private farms (Prosterman, Mitchell, Rorem, 1997,

5). In essence, this line of argumentation maintains that legislation which

liberates the land market will inherently lead to a growth in private farming.

Perhaps this position will become true over the longer term, but current

evidence does not support this position. Let us consider several aspects of the

land market which impinge upon the development of private farming.

Private farmers report that most of their land came from the parent farm

from which they resigned. This means that once private farmers left their

parent farm they had to turn to the land market to obtain additional land.

Leasing additional land by private farmers is much more prevalent than

purchasing additional agricultural land, particularly in the south where demand

for land is

higher. The problems confronted by private farmers who want to lease or

purchase additional land are threefold.

First, most collective farms and their legal successors have retained

control of most of their land, or have obtained land trough post-reorganization

lease arrangements. During the farm reorganization process (1992-1994) a

farm member had a one-time opportunity to convert his/her land shares to a

specific, tangible plot of land or to lease the land shares back to the

collective

(a February 1995 government resolution allowed farm members to a reconsider

their decision after three years, in effect giving them a second chance to

redeem their land shares). It is clear that in the overwhelming number of cases

farm members assigned their land shares back to the collective. The problem

with leasing possibilities is that among non-reorganized farms there is

virtually no desire to lease land share.(7) For example, a survey of

reorganized farms

in Orel Oblast by the Agrarian Institute in Moscow found that 98.5 percent of

farm members in pilot farms had leased their land shares or signed lease

arrangements with the parent farm, as had 82.4 percent of farm members in the

second wave or reorganized farms. Among non-reorganized farms in the oblast,

only 1.4 percent of farm member respondents had leased their land shares

(Uzun, 1997, 86-87). Similar findings were reported in other oblasts as well.

Prosterman and his co-authors present data which show that only 10,900

hectares out of 190,863 (5.7 percent) had been leased to private farmers during

March-December 1996 in Samara Oblast (Prosterman, Mitchell, Rorem, 1997,

9). While farm reorganization seems to bring a greater inclination to lease land

by the land share holder, the problem is the small number of farms that have

reorganized. As of mid-1996, only about 1175 farms in Russia had privatized

according to the national privatization model adopted in July 1994 out of more

than 24,000 farms that were eligible (Wegren, 1998, 13-14).

A second problem is that the desire to sell land for private farming is

low in many regions. Affecting sales of agricultural land is the possibility of

confusion at the local level.(8) Regarding the sale of land shares, the Agrarian

Institute survey cited above found that among reorganized and

non-reorganized farms in Rostov Oblast, less than five percent of farm

members in both types of farms desired to sell their land shares (Uzun, 1997,

88).(9) Prosterman and his co-authors were not able to confirm any land sales

to private farmers in their 1995 report or their 997 report in which they

traveled to a number of different oblasts (Prosterman, Rolfes, and Mitchell,

1995, 180: Prosterman, Mitchell, Rorem, 1997, 13). Affecting the desire to

sell a land share is the disposition of the land share holder. If a farm

member sold his land shares he would have to leave the parent farm. Because a

significant percentage -- usually from one-third to one-half -- of farm

members are pensioners, they are

often reluctant to leave a parent farm. The economic environment is hostile

and uncertain and land is a hedge against inflation. Farm pensioners often do

not want to lose their land rights and do not want to move from the area they

had lived and worked.

A third problem is that the demand for land to undertake private farming

is low. Data from Roskomzen indicate that the demand for land to conduct

private farming is extremely low, and as the economic environment remains

hostile the desire has declined. National-level data on land purchases from

local governments for private farming during 1993-1995 showed a straight

line decline: 763 purchases in 1993, 380 in 1994, and 175 in 1995. To put the

demand for private farming land in context, the number of land sales from

local governments for individual dwelling construction, private plots, dacha

plots, and collective gardens totaled 134,794 in 1993, 109,894 in 1994, and

62,481 in 1995 (Krest'yanskiye vedomosti, No. 29, 1996, 8). Given the fact

that private farm profitability has declined significantly since 1994 (see

below), that farm bankruptcies have increased dramatically, and that private

farmers cultivate on average only one-half of the land area they possess, it is

little

wonder that demand for additional land is low in many areas of Russia.

Financial Realities of Private Farming

In order for private farming to be successful, privatization must be

accompanied by supplementary measures, including improved technology,

development of credit systems, adequate mechanization of farms, resolution of

deficiencies in infrastructure, and the creation of a market environment. To

achieve these goals the state can and must play a major role, and for that

reason the final factor analyzed in this paper that influences the

development of private farming is the role of the state, in particular the

provision of financial

resources and credit to private farmers.

The first six years of agrarian reform have shown that private farms

developed most rapidly when state support was strongest, and for that reason

one could argue that the role of the state is perhaps the key variable affecting

the growth of the movement. During 1992-1993, when the Russian

government offered subsidized credits at very low (negative) interest rates the

number of private farms expanded quickly and significantly. After October 1993,

when subsidized credits were ended, the number of private farm bankruptcies

began to increase and the rate of new farm creation fell dramatically (Wegren,

1996b, 111-114).

Since 1992 a large number of government resolutions and programs

have been adopted, all intended to stimulate the development of a private

farming stratum.(10) On paper the state seems to have provided extensive

financial

support for private farming. In reality, financial state support for private

farming has been plagued by several problems. The first problem is the decline

in

the level of support.(11) Federal budgetary allocations to private farming

increased

in nominal terms, but in real terms financial support declined every year since

1992. According to AKKOR reports, in constant rubles financial support per

private farm in 1991 averaged 30,000 rubles, 4,500 rubles per farm in 1992,

and only 1,000 rubles per farm in 1993 (Finansovyye izvestiya, No. 15, 1994,

3). When calculated in dollars, state support for private farming declined from

42.3 million dollars in 1992 to 6.9 million dollars in 1995 (not including

production subsidies and compensations).(12) Similar declines in capital

investments

also occurred in agriculture since 1991. State investments to agriculture

declined by a factor of 20 since 1991 when computed in constant rubles (Korneev

and Kuznetsov, 1997, 83-88).

A second problem has been a shifting of the financial burden. State

support for agriculture may come from either the federal budget or local (oblast

or kray) budgets. The trend since 1992 has been to reduce federal

expenditures, putting more of the budgetary burden on local budgets. Some

regions are able to provide adequate support for private farmers (Rostov

on-the-Don, Volgograd, Samara, and Belgorod Oblasts, and Stavropol and

Krasnodar Krays are prime examples). With the exception of those few regions,

most local budgets simply do not have the resources to provide sufficient

support to private

farmers. In 1995 for example, budgetary allocations from regional budgets

totaled 140 billion rubles, or 500,000 rubles per farm -- $100.00 per private

farm. This level of financial support was 10-15 times less than recommended

by government experts. Some regions, such as Tartarstan and Bashkortostan

did not allocate any financial support to private farmers at all (Popov, 1996,

59).

The third problem that has confronted state programs and all types of

state support to private farming has been that what existed on paper did not

necessarily translate into tangible support. In short, there has been a

considerable gap between theory and reality. Budgetary allocations indicated

only the

amount authorized, in reality only about one-half to two-thirds of total

budgetary assignments were actually distributed each year, and much of the money

was used to cover previous loan payments. Direct subsidies fared even more

poorly, as only six percent of the 240 billion rubles assigned in 1996 actually

reached farmers. During 1996 the Ministry of Agriculture reported that just

over 50 percent of the funds allocated to agriculture were received

(Krest'yanskiye vedomosti, No. 49, 1996, 2). These shortfalls affect

production as fuels cannot be obtained and machinery cannot be leased. In

addition,

included in budgetary allotments to private farmers are sums intended to be

used to pay off past debts.

With declining state support and unable to rely on outside sources of

financing, private farmers became increasingly vulnerable to increases in

input prices. As is well-known, prices of industrial products and farm inputs

increased at a far faster rate than purchase prices for food products during the

years of reform. For example, from 1991 through 1995 prices for industrial

goods used by food producers increased 2,230 percent, while purchase prices

for agricultural products rose only 752 percent (Zemlya i trud, No. 8, 996, 3).

Faced with disadvantageous prices, private farm profitability steadily declined.

One Russian academic reports that whereas "nearly all" private farms were

profitable in 1992, in 1994 less than 20 percent were profitable (Sazonov,

1995, 57-58). A recent study published by the Agrarian Institute in Moscow

found that private farm profitability from agricultural production declined from

+ 178 percent in 1992 to -66 percent in 1995. Furthermore, the relationship

between income and expenses changed fundamentally for private farming as a

whole (Sazonova, 1996, 131-134).

Financial trends such as those described above created tension in the

relationship between the government and private farmers, even though private

farmers remained the main source of rural support for the Yeltsin

administration (Wegren, 1996a). From the very beginning, private farmers were

disappointed by the level of state support. In 1992, a pro-reform/pro-private

farming paper threatened that if the voice of peasants continued to be ignored,

peasant protests would transform into strikes, blockages of transportation

arteries, and non-delivery of foodstuffs (Rossiyskiye vesti, October 1, 1992,

1).

Several years later, after little had changed for the better, the president of

AKKOR, Vladimir Bashmachnikov, charged that the Minister of Agriculture

and the Minister of Finance were involved in a "secret agreement against

private farmers" (Krest'yanskiye vedomosti, No. 2, 1996, 2).

Conclusion

This article has addressed theoretical and substantive issues

surrounding the development of a rural private farming sector in Russia. Some

analysts

continue to view the development of private farming through the prism of

decrees and laws emanating from Moscow. The assumption of those analysts

is that legal acts taken in Moscow are a significant factor influencing the

development of private farming. Based upon a series of Presidential decrees,

those analysts are optimistic about the near-term rapid expansion in the

number of private farms.

We agree that a favorable legislative environment has been important,

however, the period in which legislation was the most important aspect of

private farming passed several years ago. As was demonstrated above,

participants in agrarian reform are divided as to the efficacy of legislation

emanating

from Moscow. Moreover, most government programs, resolutions, and policy

decisions exist only on paper and are not translated into reality. Therefore, we

argue that the key to understanding the future of private farming no longer

should emphasize directives from the center. In contrast to a legalistic

approach, this article examined a series of factors which constitute serious

obstacles to the further development of the rural private sector. The implicit

argument

is that a correct understanding of private farming must take account of

broader sociological, demographic, financial, and economic influences.

The factors we analyzed are more complex and more difficult to

resolve than issuing decrees or passing laws. Those factors may be divided into

"people" and "resources." In the "people" category, the demographic base for

private farming is quite weak. There is a relative shortage of rural men aged

20-39 -- the largest component of private farmers. In addition, an older, more

conservative rural population is less disposed to using the land market in ways

that would benefit private farmers -- and that assumes that private farmers are

able or are interested in acquiring more land. National data show that average

private farm sizes have not increased substantially despite the presence of a

land market, and this fact reflects both supply and demand circumstances.(13)

In the "resources" category, a harsh financial and economic

environment, as well as rising bankruptcies have contributed to the

unpopularity of

private farming as a reform option, measured by the small number of private

farms per 1000 persons. The financial and economic climate are not likely to

improve until -- and unless -- the government is able to translate its policies

that exist on paper into tangible and adequate support for private farmers.

There is little evidence of an ability to do so during the first seven years of

agrarian reform. Moreover, private farms remain undercapitalized when

compared to other developed nations. Private farms have too few tractors, too

few

trucks and other means of transport, and too few buildings for animals and

storage. The fact that GDP has declined by 50 percent since 1990 suggests

that the Russian economy will be unable to produce the machinery, the

buildings, and the capital stock needed by private farmers.(14)

Thus, unless the trends analyzed herein in somehow drastically change,

there is little reason to expect private farms to increase in number or to

expand

production significantly in the near to mid-term. Food production from private

farming will remain of secondary significance compared to collective farms,

join stock farms, and production from the population. According to the United

States Department of Agriculture, about 48 percent of food production in 1996

came from the "private sector" which includes private farms and production

from the population's personal plots. In reality, 46 percent of "private"

production came from the population's agricultural plots, and only 2 percent

from

private farms (Economic Research Service, 1997, 43,45). With 6 percent of

the nation's agricultural land and 2 percent of output, private farming has not

proved to be a realistic alternative to larger agricultural enterprises, despite

government support and a more favorable legal environment. The significance

of our analysis is that the Russian agrarian system and agricultural production

are likely to remain dominated by large agricultural enterprises.

Notes

(1.) For instance, in July 1997 it was reported that 94 percent of all

agricultural enterprises

were considered private (Izvestiya, July 31, 1997, 2). Other aspects have of

of course

changed as well, such as the rural wage structure and rural social policies,

but those are

policy reforms, not institutional changes in the agricultural system.

(2.) On the same question, 40 percent of private farmers answered that the

decree's

influence was positive and 34 percent of farm managers responded that the

influence

was negative.

(3.) The most common response to this question by private farmers was "too

hard to answer" (29 percent); and "influenced negatively" (47 percent) by

farm managers.

(4.) As the rate of farm creation was stagnating, private farm bankruptcies

increased

dramatically: 5,000 in 1993, 14,000 in 1994, 26,000 in 1995, and more than

25,000 in

1996. During 1995, 25 regions of Russia experienced a net decline in the number

of

private farms; in 1996 that number rose to 49. During 1996, for every 100 farms

created.

96 went out of business (Terent'ev, 1996, 94).

(5.) Private farming has been susceptible to many of the same problems that have

plagued

the entire economy: non-payment for production, inflation, price disparities

between

agricultural and industrial goods, ineffective financial, credit, and tax

policies, depressed

consumer demand, and unfulfilled budget financing. In addition, private farmers

have

confronted a range of specific problems, most of which have been well-documented

and need only be mentioned here. These include problems obtaining fuels,

fertilizers,

technology, and farm equipment; affording land reclamation; and deficiencies in

rural

infrastructure. In addition, private farmers often have difficulty obtaining

credits and

loans to finance start-up or operational costs, and despite the existence of

legislation

farmers find it difficult to obtain mortgages on their property (Durgin, 1994;

Zhurek,

1994; Wegren, 1996b).

(6.) In contrast to private farms, by the end of 1996 over 16 million land plots

were

privatized for private plot usage, as were more than 20 million plots in

collective

gardens, dacha plots, and other small-scale individual activities.

(7.) In this discussion, "reorganized farms" refer to farms that implemented the

"Nizhnii

Novgorod Model" of farm privatization, which was adopted as a national program

of

farm reorganization in July 1994. "Non-reorganized" farms refer to farms that

have

not adopted the national model.

(8.) The State Duma, within two weeks of Yeltsin's March 1996 decree, adopted

its own

resolution that declared Yeltsin's decree to be illegal. Although the Duma

resolution

was non-binding and had no legal force on the president, according to one

Russian

academic the effect was to create confusion among local rural residents and to

give

local officials greater latitude in regulating the local land market

(Patsiorkovski, 1997).

(9.) The study did point out, however, that the desire to sell land shares was

increasing

among members of reorganized farms due to dissatisfaction with leasing

arrangements.

The survey reported that in a majority of cases the farm management dictated

the terms

of the lease. With few options, the leasing market was not competitive and thus

farm

members felt compelled to comply, even though their participation in

negotiations had

been minimal (Uzun, 1997, 86-89).

(10.) Federal financial support to private farms has consisted of several kinds:

(a) direct subsidies and compensations to producers;

(b) credits in-kind which allocate resources, usually fuels, to food

producers that

have to be repaid after the harvest;

(c) preferential credits, which allow producers to borrow at subsidized

interest rates

and which must be repaid at a future date; and

(d) a leasing program, introduced in 1994 which allowed producers to lease

farm

machinery while the state subsidized the cost.

(11.) This problem plagued agriculture as a whole, not just private farming.

As a percent

of the federal budget, the amount allocated to agriculture dropped from 17.4

percent in

1992 to about three percent in 1997. We should note that the declines are even

greater

than the percentages indicate because of the fact GDP has also declined

significantly.

(12.) Using average of ruble-dollar exchange rate for 1995.

(13.) In European Russia during 1993-1997, of the eight economic regions,

private farms

decreased in average size in three regions, one region showed no change, one

gained

one hectare in average size, one gained two hectares, and one gained three

hectares.

Only the Volga region showed a significant increase in average size, rising from

75

hectares in 1993 to 91 hectares in 1997.

(14.) In January 1997 the number of cattle was down by some 40 percent from its

1990

level; cows 22 percent, pigs 50 percent; and sheep and goats over 60 percent.

The

agricultural machine supply had similarly been depleted. Acquisition of tractors

by

food producers declined steadily: from 143.7 thousand in 1990 to 9.1 thousand in

1996; trucks from 97.6 thousand to 4,700, and grain combines from 37.8 thousand

to

4,700. With depreciation exceeding replacement by a factor of 1.9-2.2 the number

of

tractors and combines in 1997 is one-third smaller than in 1990, and only 70

percent

are operational. Fertilizer applications have declined from an average of

100-120 kg

per hectare during 1986-1990 to 10 kg per hectares in 1997. It is estimated that

farmers

are extracting 4.5 times as much nutrients from the soil as they apply and there

are

fears that soil degradation could become irreversible in some grain growing

regions.

Land reclamation and improvement work has virtually ceased. The rate of

depreciation

of the irrigation systems exceeds the replacement rate by a factor of 10. In

1995, for

example, while only 5,500 hectares of new agricultural land were cultivated and

15,700

hectares improved, more than 200,000 hectares of agricultural land were taken

out of

service. Overall, more than 8 million hectares of cultivated agricultural land

used for

grain-growing have been withdrawn from production since 1992. Private farmers as

well as larger agricultural enterprises are affected by these aforementioned

trends.

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