[Prev][Next][Index][Thread]
A.Reed (1) PRIVATIZATION AND AGRARIAN REFORM IN RUSSIA
Privatisation and Agrarian Reform in Russia.
(PART 1)
Electronic Conference Contribution
by
Andrew N. Reed P.Ag.
U.K./Canada
Outline
1. Introduction
2. Summary
3. Background
3.1 The Current Situation in Agriculture
3.2 Russian vs. Non-Russian Perspectives
3.3 Organisation
3.4 Infrastructure
4 The Role of Complementary Components in Agrarian Reform
4.1 Incentives
4.2 Availability of Relevant know-how.
4.3 Independent Decision Making Ability
4.4 Stable Public Policy Environment
4.5 Recourse to Legal Protection
5. The Exaggerated Impact of ÓStand AloneÔ Privatisation in Agrarian
Reform
5.1 Privatisation and the Work Ethic
5.2 Privatisation and Sustainable Land Management
5.3 Privatisation as a Precondition for the Mortgaging of Land
5.4 Privatisation as a Precondition for the Re-aggregation of Assets.
Notes
APPENDIX I Evolutionary Economics: The Theory of Development
Notes
APPENDIX II: The Agro-Technical Legacy of Soviet Socialism
Notes
Bibliography
Privatisation and Agrarian Reform in Russia.
Electronic Conference Contribution
by
Andrew N. Reed P.Ag.
U.K./Canada
1 Introduction:
The basic proposition argued in the following paper is that privatisation is a
necessary, but not sufficient, condition for agrarian reform in Russia.
I acknowledge at the outset that I am assuming the role of devilÒs advocate.
The objective here is not to deny the fact that privatisation is a large and
very important piece of the agrarian reform jig-saw puzzle. It is. However
if the above argument is sustained, it implies that privatisation should be
considered one of the last steps in the reform process rather than one of the
first.
A very elegant solution to the legal aspects of privatisation, which has
become known as the ÓNizhny Novgorod modelÔ, was developed by Dr.
Vasily Yakimovitch Izun and Dr. Natalya Ivanovna Shagaida of the
Russian Academy of Agrarian Sciences{1}. This approach emphasises the
education of shareholders regarding their rights and responsibilities,
allocates agricultural asset ownership via an open process and encourages
shareholders to voluntary combine them in whatever configuration they
alone deem most effective in a bottom-up process. The argument made
here, however, is that much of the potential created as a consequence of the
privatisation work is lost when it is implemented in isolation, with
insufficient recognition of the complementary role as yet inadequately
played by the other ÓpiecesÔ of the agrarian reform jig-saw puzzle.
This proposition immediately begs a definition of agrarian reform which is
acceptable to all the relevant constituencies. From my perspective, the lack
of unanimity among the various constituencies as to the objectives of the
ÓreformÔ process in agriculture is a major stumbling block. Without a
consensus regarding objectives, it is easy to keep an endless debate alive, and
impossible to move on to the subsequent and more important second
question, namely, Óhow do we get there from here?Ô.
>From the perspective of the consumer the domestic agricultural sector
should provide a broad range of high quality food stuffs at reasonable cost.
>From the point of view of the taxpayers and the state as a whole agriculture
should absorb a minimum of state funds. Agricultural producers should
have access to the resources necessary to generate an acceptable standard of
living and be protected from the wholesale confiscation of the fruits of their
labour. The bureaucracy associated with the agricultural sector should be
oriented toward supporting agricultural development.
At the present time, all these objectives are remote from realisation.
RussiaÒs agriculture continues to produce a narrow range of poor quality
foodstuffs using the intensive and hence high-cost production strategies
appropriate during the Soviet period. Russian consumers are spending a
disproportionate amount of their disposable income on food, and much of
their leisure time in subsidiary household plot or dacha food production.
Taxpayers and politicians should be extremely dissatisfied with the drain on
scarce state resources the agricultural sector represents. Agricultural
producers are bewildered by post-Peristroika changes in their terms of trade,
their reduced access to subsidies, loss of protection from imports and
uncertainty regarding the on-going policy environment. The bureaucracy,
which was successively expanded in a futile and increasingly desperate
attempt to prop up the sector during the Soviet period, is for the most part a
reluctant participant in the reform process which entails a dramatic re-
definition of its role and orientation. Russia as a whole suffers a drain on
its scarce foreign currency reserves in order to import food. Ultimately it
runs the risk being a political hostage of countries such as Poland and the
U.S.A. on which it is increasingly dependent for its food supplies.
Hence for the purposes of this discussion, the reform process can be defined
as subsuming any and all initiatives which assist the sector move away from
the current situation toward the realisation of the objectives specified above.
2 Summary:
One of the obstacles inherent in any debate over agrarian reform in Russia
involving both Western and Russian participants is the tendency on both
sides to make assumptions which may not be valid. Simply stated,
Westerners often fail to understand where the Russian agricultural economy
is coming from; Russians generally donÒt know where the so-called Ómarket
reformsÔ are taking them, or why.
The fact that the participants in the debate over agrarian reform in Russia
sometimes labour under assumptions of dubious validity contributes to the
distressing tendency of both sides to latch onto relatively simple Ómagic
bulletÔ solutions, such as privatisation or subsidisation, to an exceptionally
complex problem. Unfortunately, Ómagic bulletÔ solutions, often invoked in
response to the symptoms of an underlying problem rather than the problem
itself, invariably compound rather than alleviate the difficulties.
The somewhat esoteric observation that simple solutions are not applicable
to complex problems is clearly inadequate grounds on which to formulate a
conclusive argument. The substantive argument in favour of the
proposition that privatisation is a necessary, but not sufficient, condition for
agrarian reform in Russia consists of two parts:
In the first part, it is argued that the other pieces in the agrarian reform
jigsaw are considerably more important than often appreciated. For the
agricultural sector to play a positive role in the Russian economy it needs the
following:
economic incentives
access to appropriate know-how
independent ability to make decisions
a stable policy environment
recourse to legal protection
For all its merits, privatisation at the agricultural enterprise level cannot
address these broader issues.
In the second part, it will be pointed out that the benefits of privatisation
are, in the absence of the other components of agrarian reform, exaggerated.
The main themes to which attention is devoted in this section are the
relationship between private ownership and the work ethic, sustainable
agricultural practices, the mortgaging of land and the transfer of agricultural
assets into the hands of those best able to realise an economic return from
their development.
3 Background:
3.1 The Current Situation in Agriculture
To Russians, it is readily apparent that the moves away from centrally
planning and control resulting from market oriented reforms elsewhere in
the economy have to date been sufficient only to destroy the foundations on
which Soviet agriculture depended, while the distance from a true market
economy in agriculture remains sufficiently large to deny the sector any of
the alleged benefits.
A market economy is based on the premise that the Ócustomer is always
rightÔ. Businesses are involved in a continuous and competitive process of
manoeuvring to meet customer needs. A planned-and-controlled economy
is incompatible with consumer sovereignty. Yet Peristroika introduced
consumer sovereignty into a command and control economy, with
predictable consequences.
Russian agriculture therefore finds itself bewildered and betrayed by post-
Peristroika events. It is currently at a cross-roads: on the one hand it faces
widespread collapse into an extended dacha society: family operated small
holdings, often using part-time labour, oriented primarily towards providing
sustenance to or supplementing the standard of living of the family unit; on
the other is the potential for the sector to recapture a sizeable share of the
domestic market and regain its traditional position as an important exporter
of various commodities.
The former ÓsubsistenceÔ option might be encouraged either by explicit
policy initiatives or by default as a consequence of an inability of policy
makers to develop and implement a coherent strategy. This subsistence
option is the default position to which the sector will tend in the absence of a
concerted effort in the other direction. It has some merits: foreign suppliers
will enjoy a substantial and growing share of the Russian market; the
bureaucracy will not have to spend any money on agricultural production
and could be reconstituted as The Ministry of Rural Welfare with a sharply
reduced budget; foreign sponsored technical assistance initiatives in the
agricultural sector could cease; taxpayers and politicians would at least see
some humanitarian benefits from the reduced level of spending on the rural
sector; consumers would have to rely on high quality but more reasonably
priced imports or devote even more time to dacha plot production, with a
net improvement in nutritional standards. Net out-migration from urban
areas might eventually occur offering more widespread access to a healthy
lifestyle; rural residents would participate in a rudimentary but sustainable
local ÓblackÔ economy, beyond the reach of the mafia or the tax authorities.
I am not suggesting that the ÓsubsistenceÔ option is desirable. However if
the alternative objective is to be realised, agricultural policy makers owe it to
those who are prepared to fund the transformation of RussiaÒs agriculture,
those involved in agricultural production, and those in the relevant
bureaucracies that a coherent strategy to attain these objectives exists, that
there is the will to implement it, and that its implementation will make
optimal use of the resources allotted to the process.
In the absence of the coherent and integrated strategy alluded to previously,
privatisation of agricultural enterprises will run the serious risk of being
viewed retrospectively as yet another unnecessary expense incurred in the
transformation of post-Soviet agriculture into a subsistence economy.
3.2 Russian vs non-Russian Perspectives
The workings of a market economy puzzle most Russians: hence they are in
position to assess the damage, but not the potential benefits inherent in
extending meaningful market reforms to agriculture . I am frequently struck
by the extent to which popular misconceptions prevail in Russia about how
the market economy really operates. These misconceptions are
understandable: widespread study of the subtleties of the market mechanism
was hardly encouraged during the Soviet period.
The economics of a market economy agriculture, complicated as it is by the
pervasive involvement of the state is particularly baffling. The role of
government intervention in a market economy agriculture is generally
misunderstood. It is however understandable that Russian policy makers
focus on the government involvement in the sector, the aspect with which
they feel most comfortable, although they often fail to appreciate the
implications of government intervention in a market economy context. The
possibility that Russian policy makers might Óassume a market economyÔ
and them randomly adopt various western agricultural policies with out
appreciating those consequences, is quite frightening.
I am less reticent when it comes to criticising what I see as dangerous failings
on the part of some of my foreign colleagues who are actively involved in the
current debate. The frequent lack of appreciation for RussiaÒs economic
history in general, and the role of agriculture therein is unfortunate. More
disturbing however is their widespread lack of appreciation of how a market
economy really operates, the peculiar ways in which a market economy
influences agricultural production, and, consequently, their inability to
distinguish between the positive and negative implications of government
intervention in agriculture.
The symmetry of these criticisms, is I hope, readily apparent. One of the
problems, of course is that which is collectively referred to as a Ómarket
economyÔ is a moving target. Understanding of the way in which the
market economy operates in the West has taken a great leap forward in the
recent past. Economic theories which underpinned corporate strategy and
public policy formulation for decades are being discarded{2}. Economics is
increasingly being recognised as an evolutionary science, and the comforting,
mechanistic models which held out the hope that the future implications of
current or planned actions could be accurately predicted are being
discredited.
These changes at the theoretical level have been reflected in a much more
gradual evolution away from Ógrowth-orientedÔ objectives and toward
Ódevelopment-orientedÔ objectives in the market economies at the level of
private sector enterprises. Governments too, are starting to experience
pressure to follow suit. The Russian economy is now facing a similar
transition, but on a revolutionary, fast-track time scale. (Ironically, those
multi-national NGOs which are completely immune from market economy
influences are taking the leading role introducing the former Soviet Union to
its mysteries.) In order to establish a common understanding of the
terminology and the implications of the new Óevolutionary economicsÔ for
the current debate, I attach a summary for those who may be interested
(Appendix 1: Evolutionary Economics: the Theory of DevelopmentÔ)
3.3 Organisation:
One of the implications of this revolution in economic thinking in the West
which is relevant to the current discussion involves the role of government.
Increased understanding of the sensitivity and sophistication of the market
mechanism goes a long way toward explaining why government intervention
in a market economy frequently results in unanticipated responses from
independent economic agents. The insights of an evolutionary economics
permit fuller appreciation of the negative implications of government
intervention. The scope for effective and desirable government intervention
is being more narrowly defined as a consequence.
Implicit in Peristroika was acknowledgement Óat the topÔ that fundamental
changes were required in Soviet socialism. The no less momentous changes
in understanding of economic theory and practice in the West have taken
place with much less fanfare than those associated with Peristroika in the
former Soviet Union. From a Russian perspective one possible explanation
might be that these changes have not yet been acknowledged Óat the topÔ
and adopted as official policy. However, the lack of widespread publicity is
due to the fact that a market oriented approach does not require official
sanction: widespread adoption of a new perspective or Óa new way of doing
somethingÔ by independent firms or individuals depends only on its ability
to improve viability{3}. As such the market mechanism itself automatically
selects those new ideas and Ónew ways of doing thingsÔ which successfully
aid the achievement of economic objectives.
Westerners often think of the Soviet system in terms of the economic
framework with which they are familiar. For example, from a western
perspective, there is a superficial similarity between Russian agricultural
enterprises in the post-Peristroika period and many of those in the West.
There are tractors large and small, assorted implements for them to pull,
combines harvesters and trucks in abundance, impressive arrays of barns
and storage facilities, grain processing facilities, garages and the like. It is
this external similarity which leads western observers to seek answers for the
apparent divergence in the effectiveness with which these assets are used in
Russia and elsewhere in the organisation of production.
RussiaÒs agricultural institutions which the reform process must either work
through or amend evolved in unique circumstances during the Soviet and
preceding Tsarist period. From a western perspective, the results are bizarre.
As much of the impetus and funding for ÓreformÔ in the agricultural sector
has come from the West, it is not therefore surprising that well-intentioned
remedial assistance has focused on the large scale collective farming of land
owned by the state - exactly those institutional features to which foreign
observers have traditionally ascribed a causal role in the under-development
of Russian agriculture. Privatisation and decollectivisation hence tend to be
given priority by non-Russians in the process of agrarian reform.
Privatisation and de-collectivisation were (unfortunately, in my view) closely
associated during the early days of the reform process associated with
Gaidar and the creation of AKKOR, the Association of Russian Peasants
and Co-operatives. The fermerski khozaistvo movement which resulted from
these initiatives is an amalgam of bona fide commercially motivated
entrepreneurs and subsistence oriented family farmers. One of the main
positive attributes of the fermerski khozaistvo movement is the elimination of
the dichotomy between the ÓcollectiveÔ and the ÓprivateÔ sector which is an
important psychological impediment to the effective development of the
rural economy.
At present the case as to whether the fermerski khozaistvo movement has
been, or will be, a success depends heavily on the sample selected to bolster
the ideological position of the observer. Whether or not these enterprises can
compete on a level playing field with other organisational forms of
agricultural enterprises will not be obvious until their tax holiday runs out
next year.
In the case of China, which is often (and again in my view, ill-advisedly)
cited as role model for desirable reform in Russian agriculture, the sector
was decollectivised but not privatised as a consequence of the household
responsibility system reforms of 1980. This policy was, like the Chinese
Communist revolution itself, peasant motivated {4}. In the Chinese case
both the Revolution and the subsequent reforms appear in retrospect to
have been relatively successful.
These observations raise the question as to whether private, collective
agriculture is in fact a viable Ómiddle groundÔ option which adequately
reflects the role of historical and psychological factors in the Russian
context. This option has not, so far as I am aware, received any serious
consideration on the part of the two main protagonists in the debate over
agrarian reform in Russia: private ownership is usually anathema to one
side and collective farming is often anathema to the other. If there were
sufficient support for such a middle ground position to enable both sides to
save face and work towards a shared vision of the objectives of agrarian
reform in Russia it would be a major step forward.
Ultimately, however, the organisational form of agriculture which is most
appropriate to the economic circumstances in which it is to operate should
be allowed to dominate. It should be a consequence of agrarian reform, not
a precondition. For this to occur, agricultural enterprises of all types need
the maximum possible latitude and support to change as quickly as possible
from their current economically non-viable status to self-supporting entities
which can make a substantial contribution to the national economy instead
of continuing as a perennial and chronic drain on scarce state resources,
3.4 Infrastructure
The legacy of the Soviet period in agriculture is, however, much more
pervasive than its organisational structure. Yet with organisational
considerations an apparently obvious explanation of the current difficulties,
there is a consequent a reluctance to ask the question ÓWhat should the
infrastructure of Russian agriculture look like given the fact that it has
evolved in a completely different manner to that in the west?Ô
The infrastructure with which post-Peristroika agriculture must work was
installed during the Soviet period to meet criteria which were independent
from and had little or nothing to do with the development of the agricultural
economy. In contrast to the situation in the west, it was not installed to
increase the productivity, profitability, or effectiveness of the sector {5}.
Consequently, no matter how superficially suitable to a market oriented
agriculture the infrastructure may look at first glance, it is in many respects
inappropriate to the task. For the benefit of those who may be interested, I
have elaborated on this theme in Appendix II: The Agro-Technical Legacy
of Soviet SocialismÔ.
>From the perspective of agricultural economics and technical change the
political economy of the Soviet period gave rise to a prevailing mode of
agricultural production in Russia which may be characterised as intensive
and underdeveloped. The economic environment of the post-Peristroika
period can sustain neither: the terms of trade have shifted substantially
against the agricultural sector, the sector no longer has a captive domestic
market, and the state has reduced its support both in terms of subsidies and
the manipulation of prices.
Hence now that the Soviet style pricing regime has collapsed, agricultural
enterprises find themselves in a classic Catch-22 situation: they have no
alternative but to continue to attempt the high cost and intensive production
practices of the Soviet period but cannot afford to do so. Producer prices
no longer cover the cost of the necessary inputs, specialists or specialised
services ensuring that efforts along these lines will be unsuccessful. Yet they
have no choice because the know-how to shift to alternative, low cost
practices, simply does not exist locally.
Although there is a link between agricultural development and the intensity
of agricultural production in the minds of many people, the linkage is not a
direct one. Intensity of production, in agriculture as elsewhere, is an
absolute measure of the resources expended in production per unit of
output. The development of agriculture is a measure of the efficiency with
which those resources are used. It is therefore just as possible to have an
extensive agricultural system which is highly developed as it is to have an
intensive mode of agricultural production which is under developed. The
policy and technical assistance effort in Russia at the present time needs to
facilitate a move from the latter to the former.
The physical infrastructure of post-Soviet agriculture, while playing a
significant role in explaining why the agricultural sector is incapable of
responding quickly and in the dramatic fashion anticipated by some western
observers to Ómagic bulletÔ initiatives like privatisation, does not provide
the complete answer. The psychological legacy of Peristroika in the rural
economy is of considerable importance.
In the Russian countryside, the appeal to altruism encapsulated in MarxÒs
famous dictum ÓFrom each according to his abilities, to each according to
his needs !Ô was successful in the countryside for a much greater period of
time than in urban Russia. Peristroika was widely accepted among cynical
Muscovites as inevitable . But in the majority of cases workers in the rural
economy still believed that they were working toward a Ólight futureÔ
(svetlaya bydyshi) when Peristroika dropped like a bombshell upon them.
Demand for the traditional output of agricultural enterprises has collapse,
and this collapse in demand is being communicated to the agricultural sector
in a sharp relative decline in producer prices. These deteriorating terms of
trade are being exacerbated by diminished state financial support for the
sector and by the fact that some deregulation of agricultural production has
not so far been matched by a corresponding level of deregulation in the
industrial sectors which provide inputs to, and process and distribute the
output of, agriculture. Although the agricultural sector remains heavily
dependent on these quasi-monopolies, it has lost its own monopoly position
as a supplier to the domestic market. Growing season subsidies were further
curtailed in 1995 as the Federation government attempted to curb inflation.
To add insult to injury, the state has abrogated its traditional role of fiddling
the prices of agricultural inputs and output to ensure that agricultural
enterprises appeared profitable. Insofar as the agricultural sector is
concerned, ÓCatastroikaÔ is indeed a more appropriate term than
ÓPeristroikaÔ.
I was initially very puzzled by the almost total absence of co-operation
among individuals or groups in the agricultural sector in the post-Peristroika
period. This puzzled me because immigrants from eastern Europe played a
prominent role in the development of the agricultural economy of western
Canada where I grew up. There the high degree of co-operative effort and
the widespread development of co-operative institutions established to
address problems remarkably similar to those now faced by the agricultural
sector in Russia is widely attributed to the positive influence of immigrants
from eastern Europe.
The marked aversion to co-operation and altruism in the agricultural sector
is understandable in light of its current economic circumstances. There is no
economic
justification for closer community-wide collaboration when pressure
towards an Óevery-man for himselfÔ subsistence existence is so strong, when
privatisation efforts designed to institutionalise the separation of the
economic and social spheres are underway, when the policy environment is
so uncertain and when personal time horizons are exceptionally near-term.
As the collective sector has collapsed, farm residents have been forced to
devote the bulk of their energy to their own private plot production.
Undoubtedly this preoccupation with private sector production has
increased pilfering from the collective sector, contributing to the latterÒs
downward spiral and exacerbating the breakdown in community cohesion.
The psychological damage of Peristroika manifests itself in the negative
repercussions of envy in the rural population. Everyone seems content to be
miserable as long as everyone is miserable to the same extent. Those who
rise above the norm risk being the victims of the reprisals to which rural
residents are particularly vulnerable: arson, theft, and vandalism. There is
no spirit of friendly competition or Ókeeping up with JonesÒsÔ in the Russian
countryside: rural fairs and agricultural exhibitions which give considerable
impetus to innovation and improvement in the rural economy elsewhere are
conspicuous by their absence.
4 The Role of Complementary Components In Agrarian Reform
4.1 Incentives
The main factors depriving agricultural producers of Russia of meaningful
economic incentives are the erosion of demand and the tax system. These
are dealt with in this section. However the technology base of agriculture
and public policy apart from the tax system also exert an influence on the
incentive structure of the rural economy, and these are discussed separately
below.
The fortunes of Russians have diverged considerably as a consequence of
Peristroika: many families find themselves much better off in relative terms
than they did during the Soviet period; many others have been economically
disadvantaged by the post-Peristroika changes.
Both dimensions of this divergence have negative implications for domestic
agriculture: those who are better off have both rising expectations in terms
of the quality and variety of food they eat and the financial means to gratify
those expectations. At present they are satisfying their requirements with
imported foodstuffs. Those who find themselves worse off are increasingly
reliant on the personal production of private and dacha plots and the
informal mechanisms of exchange which integrate these sources of supply
into the economy. Between these two extremes, the vast majority of
Russians are now taking advantage of access to high quality imported food
products to the extent that their circumstances allow. This ranges from the
occasional treat × a banana from street vendor or a visit to a western style
restaurant × to regular purchases of imported products in local shops and
kiosks.
The clear message to domestic agricultural producers and food processors
from the market place is that demand for agricultural output of the
traditional mediocre quality is now very limited. Availability of relatively
large quantities of low quality produce (from agricultural enterprises, private
plots, and private farms) relative to demand has depressed prices. At the
same time, any enterprise able to produce and deliver output which is of a
quality level superior to the norm should be able to obtain a premium price.
Russian agriculture clearly no longer enjoys a monopoly role supplying
domestic demand, and the agricultural sector is slow to come to terms with
the economic impact of this reality. This should not be a surprise: after all,
for as long as anyone can remember farm managers have been able to sell
their entire surplus output at Ócost-plusÔ prices irrespective of quality
considerations.
Another major impediment to profitability on the part of agricultural
enterprises is the fact that some deregulation of agricultural production has
not so far been matched by a corresponding level of deregulation in the
industrial sectors which provide inputs to, and process and distribute the
output of, agriculture. The agricultural sector remains heavily dependent on
these quasi-monopolies, which still charge the high prices or pay the low
prices (respectively) required to cover the cost of their inefficiencies.
First of all, agricultural enterprises often fail to appreciate the extent to
which the rules of the game have changed in the post-Peristroika period.
Most continue to wait for a resumption of government subsidies. Few
appreciate the devastating effect of imports on the demand for the sectorÒs
traditional products.
Production for profit is a necessary stimulus to the innovations which
increase economic efficiency and thereby, contribute to development. In the
context of agriculture therefore, profit provides the necessary stimulus to
the innovations which reduce the cost of production and increase the quality
and quantity of available food by a process of specialisation, rationalisation
and geographical redistribution of production. The implications of the
inability of enterprises in centrally planned economies to innovate and
experiment, considered by some to be their greatest weakness, is discussed in
Appendix II.
Traditionally of course, the obligation of agriculture in Russian society has
been seen as the provision of cheap food, irrespective of its profitability.
Ironically, of course, the unintended impact of such a policy is just the
opposite: although the producer and wholesale prices may be low, the
quality is also low and the cost to the state budget to get the food out of
agricultural enterprises and to consumers is enormous. Subsidies on
purchase prices, subsidies in the form of soft credits and the vast
bureaucracies required to administer an artificial system of fixed prices all
add to the hidden cost. Low quality also gives rise to the premiums paid for
imported products. Insufficient production produces the necessity of
imports. Both adversely impact the balance of trade.
Although the concept of profitability was rehabilitated somewhat during the
latter part of the Soviet period, it remained a largely theoretical concept.
Enterprise profitability was externally controlled as the supply of inputs to
agriculture, the decisions regarding what to produce, and the purchase of
output were largely in the hands of the state. Material and equipment was
sold cheaply to agriculture in order to create demand for the massive
industrial output of which the country was justifiably proud. Food was then
purchased from agricultural enterprises for relatively high prices and sold
more cheaply to the population, thereby keeping the rural economy running
and urban consumers in orderly queues.
One of the overriding considerations which is frequently overlooked in the
discussion of incentives is the inability of a large proportion of the
agricultural population to appreciate that profitability is now determined by
the enterprise itself, and not by bureaucrats manipulating prices in
GOSPLAN.
Notwithstanding the sharp deterioration in its terms of trade, the
agricultural sector remains the subject of a vast array of punitive taxes.
Laws and decrees designed to mitigate these burdens are on the books, but
largely ignored. The prevailing attitude to the agricultural sector remains
much as it was during the Soviet period: one way or another the urban
industrial complex is going to confiscate any economic value generated in
the rural economy. In addition to the high absolute level of taxation, the
complexity of the system and the uneven manner in which it is enforced
compound the market disincentive to economic exertion (outside the private
plot sector) inherent in the tax regime.
The standard calculation undertaken by those currently contemplating
spring planting runs as follows: for each kernel of grain planted ten should
be obtained at harvest. One way or another, the state will claim eight. One
must be saved for next yearÒs seed. The one remaining is the potential profit.
There are considerable differences in tax burden according to the type of
agricultural enterprise. The tax system has, unfortunately, been used as a
carrot to encourage certain forms of organisational change. This is
counterproductive because it opens the methodology which has been granted
privileged status to the valid criticism that it is benefiting from preferential
treatment. Such preferential treatment hinders efforts to argue the case for
reform on its economic merits. All agricultural enterprises should be treated
equally under the tax laws. An opportunity to level the playing field arises
when the five year tax holiday awarded to fermerski khozaistvo enterprises
expires next year.