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Access to Land, Rural Poverty, and Public Action$

Alain de Janvry, Gustavo Gordillo, Elisabeth Sadoulet, and Jean-Philippe Platteau

Print publication date: 2001

Print ISBN-13: 9780199242177

Published to Oxford Scholarship Online: October 2011

DOI: 10.1093/acprof:oso/9780199242177.001.0001

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Transition from Collective Farms to Individual Tenures in Central and Eastern Europe

Transition from Collective Farms to Individual Tenures in Central and Eastern Europe

Chapter:
(p.349) 14 Transition from Collective Farms to Individual Tenures in Central and Eastern Europe
Source:
Access to Land, Rural Poverty, and Public Action
Author(s):

Johan F. M. Swinnen

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199242177.003.0014

Abstract and Keywords

Land reform played an integral role in the overall agrarian reforms in all Central and Eastern European Countries (CEECs). This reform began during the early 1990s and it served as a crucial precondition for the restructuring of both the collective and state farms. Land property rights were transferred either from collective farms or from the state to private agents as part of many land reform measures. This happened despite the fact that land ownership remained prohibited in some areas. Although the reforms across all CEECs resulted in a greater number of individual tenures, there were significant discrepancies in the extent of the shift as observed throughout the different farming specializations and the regions in the CEECs. This chapter gives a comparative analysis of land reform and the implications of the shift from collective to individual tenures within the CEECs.

Keywords:   land reform, CEECs, collective farms, state farms, private agents, individual tenures

Introduction

In all Central and Eastern European Countries (CEECs) land reform was a key part of the overall agrarian reforms that began in the early 1990s; it was an important precondition for the restructuring of state and collective farms. (This chapter makes reference to the Central European countries (CECs) which include Albania, Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia; and the former Soviet Union countries (FSU) which include the Baltics, Russia, and Ukraine. All of these countries (CECs and FSU) are referred to as the Central and Eastern European Countries.) Various land reform procedures have been chosen to transfer land property rights from the state or from collective farms to private agents.1 For example, land has been restituted to its former—that is, pre-collectivization—owners in most Central European countries (CECs) and in the Baltics, while ownership shares have been distributed to state and collective farm workers in Ukraine and Russia. In some Central Asian countries, private land ownership is still prohibited.

In all CEECs the reforms have induced an increase in individual tenures. However, the extent of the shift from collective and state farms to individual farms differs tremendously among CEECs and between regions and farming specializations within CEECs. For example, in 1995 the share of total agricultural land (TAL) used by individual farms was less than 20% in Slovakia, Russia, and Ukraine, and over 80% in Latvia, Armenia, and Albania.

This chapter presents a comparative analysis of land reform and the transition from collective to individual tenures in CEECs. The chapter first discusses land reforms (p.350) and agricultural privatization, its causes and implications for efficiency and equity. Then it analyzes the impact of these reforms, and of other factors, on the shift from collective farming to individual farms. The last section describes the different patterns of transition and complementary institutional reforms.

Agricultural privatization and land reform

Pre-transition property rights and production organization

The widespread collectivization of agriculture started in 1928 in the former Soviet Union (FSU) and in 1948 in Central European countries and the Baltics. The objective of collectivization was first to pool peasant farms into large-scale collective farms, and then, to nationalize the land and convert these collectives into even larger state farms or agro-industrial complexes. However, collectivization was implemented differently in each country, reflecting different stages of state control, and thus resulted in a mixture of property rights regimes (Mathijs 1997) including:

  • state-owned land used by state farms: land that was completely nationalized and the state held both legal and economic rights;

  • state-owned land used by collective farms: land that was nationalized; the state held the legal rights, while the collective farm held (some of) the economic rights. All land cultivated by collective farms in Albania and the FSU was state-owned;

  • collectively owned land used by collective farms: the collective held both legal and economic rights. Two-thirds of collective farmland in Hungary was collectively owned because members who left or the heirs of members who had died were forced to sell their land to the collectives;

  • privately owned land used by collective farms: individuals retained legal rights on collective farmland in most Central European countries. However, the collective farm or the state held most economic rights, the extent of which differed between CEECs. For example, since 1968 Hungarian collective farms were given much more autonomy in decision-making than in other CEECs;

  • privately owned land used by private farms: members and employees of collective and state farms were allowed to cultivate some gardens and household plots privately. The share of these private farms in total agricultural land (TAL) varies between 2% in the FSU and 15% in Romania. The only exceptions were Poland and former Yugoslavia, where collectivization either failed or was never initiated and where about 80% of TAL was cultivated by individual family farms.

Originally, farm workers in collective farms (kolkhozes) were remunerated at the end of the year as a return on their inputs, based on the performance of the collective farm. Collective farms enjoyed somewhat more autonomy than state farms (sovkhozes) in their decisions. In state farms all assets, including land, were owned by the state and farm workers were like employees in any other (industrial) firm, receiving fixed wages and social security benefits. However, gradually collective farm workers received the same social benefits as state farm workers. By the 1980s, workers in both state farms and (p.351)

Table 14.1. Most important land reform procedures in Central and Eastern European countries (CEECs)*

Collective farmland

State farmlanda

Procedure

% of TAL

Procedure

% of TAL

Albania

Distribution (physical)

76

Distribution (physical)b

24

Bulgaria

Restitution

72

Miscellaneousd

9

Czech Republic

Restitution

61

Sale (leasing)c

25

East Germany

Restitution

82

Sale (leasing)c

7

Hungary

Restitution + distribution (phys.) + sale for compensation bondsf

70

Sale for compensation bonds + sale (leasing)c

12

Latvia

Restitution

57

Restitution

38

Lithuania

Restitution

62

Restitution

30

Poland

4

Sale (leasing)c

19

Romania

Restitution distribution (phys.)

58

Undecidede + Restitution

28

Russia

Distribution in sharesg , h

40

Distribution in sharesg

58

Slovakia

Restitution

71

Sale (leasing)c

15

Slovenia

0

Restitution

17

Ukraine

Distribution in sharesg

n.a.

Distribution in sharesg

n.a.

(*) Special procedures for marginal amounts of land are not included in the table.

() Total agricultural land.

(a) Excluding research farms which are not privatized.

(b) Farm workers received vouchers in newly established joint ventures. However, as most of these joint ventures failed, farm workers received first user rights and eventually full property rights.

(c) Land is leased to individuals or entities pending sale.

(d) In Bulgaria the distinction between state and collective farms is more complicated than in other CEECs because of the creation and later abolition of the so-called Agro-Industrial Complexes. Part of the land classified under ‘state farmland’ is restituted because it was initially collective farmland and has a similar status; another part will not be privatized, and another part is the land on which large pig and poultry enterprises are built and which will be privatized separately.

(e) The Romanian government has not decided how to privatize the state farms, including the land, on two-thirds of state farmland.

(f) Each of the land reform procedures applies to approximately one-third of the collective farmland.

(g) Distribution of collective and state farmland equally per capita among collective farm members or state farm employees in the form of paper shares or certificates. Outsiders who are not entitled to land shares can receive land for private farming from a special state reserve established for this purpose (15–20% of TAL).

(h) Private ownership is prohibited in 10 ethnic republics of the Russian Federation.

cooperatives had a high degree of job and wage security, little responsibility for financial performance of the farm, and little incentive to improve productivity. Both types of farms were protected from bankruptcy by a soft budget constraint (Brooks et al. 1991).

Post-communist agricultural privatization and land reforms

Restitution of farmland to former owners is the most important process of land reform (in terms of share of total agricultural land) in the CEECs (Table 14.1). Typically, the reform laws specify that former owners be restituted the land in historical boundaries, if possible. Otherwise they receive property rights to a plot of land of comparable size and quality. With the exception of Poland and Albania, an important share of farmland (p.352)

Table 14.2. Legal attitudes to land ownership and land transactions in the Former Soviet Union (FSU) countries

Private ownership

Transactions

Armenia

Yes: all land

Buy and sell, mortgage (law of 1991)

Azerbaidjan

No

Belarus

Yes: household plots (June 1993)

Buy and sell allowed Use rights non-transferable

Georgia

Yes: all land

Buy and sell allowed only in Feb. 1996 law

Kazakhstan

Yes: only household plots (decree)

Buy and sell, mortgage Use rights: permanent and tradable

Kyrgyzstan

No

Use rights secure to 99 years and tradable

Moldova

Yes: all land

Moratorium until 2001

Russia

Yes: all land (No in 10 ethnic republics)

Buy and sell, mortgage (moratorium lifted by 1994 presidential decree)

Tadjikistan

No

Turkmenistan

Yes: potentially all farm land (constitution)

Prohibited to sell, exchange, give as a gift; leasing allowed Use rights non-transferable

Ukraine

Yes: all land

Moratorium on buy and sell; no mortgage

Uzbekistan

No: lifetime inheritable possession

Prohibited to sell, exchange, give as a gift, mortgage

Source: Lerman (1997).

is restituted to its former owners in all CECs. And even in Albania collective farmland property rights have been restituted to former owners in some mountainous regions.

In the FSU land is restituted to former owners in the Baltic countries only. Russia and Ukraine distribute land in two forms. The most important form is the distribution of collective and state farmland equally per capita among collective farm members or state farm employees in the form of paper shares or certificates. Outsiders who are not entitled to land shares can receive land for private farming from a special state reserve established for this purpose (15–20% of TAL).

Land reforms differ widely in other FSU countries (see Table 14.2). For example, private ownership of land has not been recognized in Kyrgyzstan and Uzbekistan, while in Belarus and Kazakhstan only private ownership of household plots is allowed. Nevertheless, user rights were made secure and marketable in Kazakhstan and Kyrgyzstan. In Georgia the buying and selling of land has only been allowed since 1996; in Turkmenistan it is still not (Lerman 1997).

(p.353) There is an important difference in land reform procedures between collective farmland and state farmland in CECs, but not in the FSU countries. In the latter, collective and state farmland are treated the same in the reforms. In CECs, collective farmland is mostly restituted to former owners. The main exceptions to restitution of collective farmland are in Hungary and in Albania. In Hungary, one-third of collective farm land is auctioned for compensation bonds, and another one-third is distributed among farm workers. Albania distributes its collective farm land among rural households. In the majority of CECs, state farmland is leased, pending sale of the land. The main exceptions are the restitution of state farmland in Slovenia, and the distribution to farm workers in Albania.

Whereas land has mostly been restituted in kind, this has not been the general rule for other assets. Non-land assets have been restituted in some countries, but in many cases were privatized using vouchers that could be turned into capital shares in the new cooperative farm or used for purchasing non-land assets for private use. The distribution of those vouchers was the subject of much debate. In general, the principle was that members (or their heirs) who had contributed land, labor, or other assets to the cooperative over the forty-five years of its existence should receive some share of the remaining assets. To implement this required an inventory of the cooperative's assets, their value, and a formula to determine the shares of each contributor. Both aspects posed great difficulties.

Factors affecting privatization and land reform policy choices

Four historical-institutional factors have influenced the choice of privatization and land reform policies in CEECs: (1) the post-collectivization asset ownership status; (2) the ethnicity of the pre-collectivization asset ownership; (3) the equality of pre-collectivization asset distribution; and (4) the length of Communist rule (Swinnen 1999).

Legal asset ownership

All agricultural assets, which were still legally privately owned in 1989, have been restituted in all CEECs. The principle that agricultural assets, which were formally still privately owned, are restituted to their formal owners explains several observations.

  • Differences among CEECs: where land is not restituted to former owners (such as Albania, FSU, and Poland), the land was state-owned.

  • Differences within CEECs: where part of the land is restituted (e.g., Hungary), the difference is due to legal ownership.

  • State farm land, unlike collective farm land, is often not restituted, as it was mostly state-owned.

  • In several CEECs, the basis for land restitution is the ownership distribution of land reforms implemented under Communist-dominated governments following World War II, determining the 1989 legal ownership.

  • Differences between land and non-land assets.

(p.354) Ethnicity

The privatization policy choice affects the distribution of asset ownership between ethnic groups. A general observation is that agricultural assets are not restituted to former owners who are, or have become, foreigners. The choice of the privatization process also affects the distribution of (agricultural) assets between ethnic groups within the country. Intuitively, one would expect that this motivation would lead to the choice of a privatization policy that transfers property rights mostly to the ethnic majority for the same reason that foreigners do not receive land. This occurred in the Baltics where restitution of land was chosen to allocate assets to native citizens in the presence of large ethnic minorities (Rabinowicz 1997). However, this is not always the case because it depends on the influence of ethnic minorities on the political economic equilibrium. An example of a privatization policy which benefits ethnic minorities is found in Bulgaria where the allocation of a high share of non-land assets to ‘labor contributions’ partly placated the Turkish ethnic minority who were largely employed in agriculture and not eligible for much land, although they were an important political force (Davidova and Buck well 1994).

Equality of pre-collectivization asset ownership

Equality of pre-collectivization asset ownership determines the potential conflict between the objectives of ‘equity’ and ‘historical justice.’ Theory suggests both positive and negative effects of an egalitarian pre-collectivization land distribution on the likelihood that restitution will be chosen as privatization policy. Empirical observations suggest that when social equity conflicted with historical justice, equity prevailed in the government's choice. For example, with more than half of the Albanian population active in agriculture and a highly unequal pre-reform land distribution, land restitution would have transferred most of the fertile land into the hands of a small group of families, leaving the bulk of rural households without land. Instead, the government decided to distribute the land to rural households because the prime importance of the land issue for the large number of rural voters was more important (politically) than the large vested interests and lower collective action costs of fewer former landlords.

Length of Communist rule

The most straightforward effect of the historical legacy of the land ownership is the lack of demand for land restitution in large parts of the FSU. Lerman (1997) states that nearly a century of Communism has washed away all traces of former land ownership and that very little tradition of private land ownership remains in most of the FSU. Voices for restitution or some form of compensation to former owners were raised only in the Baltics, in Western Ukraine, Moldova, and Western Belarus. In those areas, collectivization was imposed only after World War II. However, in the rest of the FSU, there was hardly any demand for restitution of land. Besides the impact on farm disruptions (see further), this lack of tradition of private ownership and demand for land restitution may also have contributed to the choice of share distribution, rather than distribution-in-kind, of land in Russia and the Ukraine.

(p.355) Land reform, property rights, and access to land

Procedures and property rights

Property rights are fully restored if all rights (user, income, and alienation rights) are given to the owners. Not all land reform schemes fulfill these criteria. For example, land reform in Latvia started during the Soviet period with the creation of private farms on a usufruct basis. Farmers were not allowed to sell this land. In addition, not all of these farmers were former owners, so they received someone else's land. When the next Latvian government decided to restitute agricultural land to former owners, conflicting claims on land were frequent, as were conflicts between land claims and privatization of farm enterprises. Such conflicts increase the discretion of local administrations. Furthermore, the conflicting claims, court procedures, and inherent uncertainty impede the progress in privatization and reduce production (Rabinowicz 1997).

Another example of incomplete property rights is ‘restitution in comparable boundaries.’ While they have chosen to restitute land, many CEEC governments have included specifications in the land law that allow the return of a ‘comparable’ piece of land (instead of the original plot with its ‘historical boundaries’). This process transfers the rights to derive income from, but not the right to sell or to withdraw an asset on which the legal ownership rights apply. Such programs allow for an individual to take out an ‘equivalent’ piece of land when s/he chooses to retrieve the land from the (reformed) collective farm. However, there are transaction costs in the process of being assigned an ‘equivalent’ or ‘comparable’ plot of land, as the plot has to be assigned by the management of the reformed farm. Although the claimant can go to court if s/he disagrees with the assignment and ‘restitution in comparable boundaries’ is often applied because of technical reasons, it affects the distribution of bargaining power between collective farm management and the claimant. In any case, in the presence of transaction costs, a priori property rights that are restituted are incomplete in this process.

The distribution of land in shares in Russia and Ukraine resulted (even more) in imperfect property rights. The distribution of land shares does not imply physical allocation of land plots corresponding to the shares. Despite the allocation of land shares to the members, the land remains in joint cultivation pending further restructuring decisions by the ‘share-owners.’ A share-owner who wishes to establish an independent farming operation (individually or with a group of co-workers) in principle is entitled to receive from the collective farm a physical plot of land corresponding to the land share. Obviously, this process implies potentially large transaction costs resulting in imperfect property rights.

These limitations on property rights are reinforced with limitations or moratoria on buying, selling, and mortgaging the land. Ukraine has a moratorium on buying and selling, and does not allow land to be used for collateral. A 1994 presidential decree lifted such a moratorium in Russia, but much uncertainty remains with a pending land law which is supposed to define the final regulations (Lerman 1997). In Belarus and Kazakhstan, private ownership is limited to household plots and hence to a small share of total agricultural land. Table 14.2 summarizes the legal attitudes regarding (p.356) ownership of land in all FSU countries as of 1996, and shows how property rights are incomplete in those countries except in Armenia and Georgia.

In several CEECs, recent amendments to the privatization and land reform laws limit the restitution of full property rights to former owners. The most striking examples of such measures are the introduction of the ‘good landlord’ and ‘co-ownership’ rules in Slovenia which allocate part of the decision-making rights on the use of the agricultural land under restitution to the state farms, which are currently using the land, as long as the state farms behave as ‘good landlords.’ Similar legal initiatives that allocate part of the effective property rights to the users of the land (the former state and collective farms) have been introduced in other CEECs (such as Bulgaria), often as a result of the return to power of ex-Communist parties.

Implementation and property rights

The most radical reform policies on paper may result in little effective change in property rights unless they are well implemented, which is influenced by: (a) technical factors and transaction costs in the reform implementation; (b) the extent to which interest groups can influence the reform implementation; and (c) the detailed regulations for implementation, in turn affected by the political influence of interest groups and political coalitions. Hayami (1991) argues that (1) using simple, transparent, and uniform rules, and (2) limiting the scope for discretionary government involvement in implementation are two key variables in a successful land reform. Little progress was achieved in some reform programs because the rules were unclear, insufficient incentives for change were provided by a little-committed government, and further blocked by collective farm management.2

The reform implementation depends critically on the institutional design of the reforms and on transaction costs. While the government has control over the choice (the design) of the policy, it has less control over the implementation (Swinnen1991b). The problems include:

  • Technical problems. Trying to value assets, to assess the validity of land and asset claims, to assign land parcels to claimants, or to develop voucher schemes and auctions has proven a very difficult process.

  • Reform implementation requires shifting powers to the relevant local institutions, which may create principal-agent problems in the presence of imperfect information. Those institutions are often influenced by local preferences and biased towards (p.357) management and employee interests, who are closely involved in the decision-making and the activities of the institutions. The potential for the existing management to manipulate the reform implementation and resulting property rights distribution depends strongly on the transaction costs for the various partners (legal owners, potential users) in a potential exchange of the assets.

  • Timing and government credibility. The privatization and transformation processes require much time, even when all parties support the reforms. Therefore, there exists a real chance that before the reforms are finished, or even well under way, the government is replaced by another which may be less supportive of the reforms. While the new government may not choose to change the privatization process, it may very well introduce a number of regulations and policies that have an important impact on the speed and the extent of the reform implementation. As a consequence, local administrations and executing institutions may feel less inclined to follow government regulations that they privately oppose, because enforcement procedures may not come into effect if the government is replaced.

Therefore, governments in favor of radical reforms have tried to restrict the ability of collective farm members and managers to influence the implementation. An example of this is from Bulgaria. The 1991 Land Law passed by the ex-Communist government did not include detailed specifications about how to implement the law. Much leeway was given to local government and collective farm management. After the 1991 elections, the new reformist government amended the law. Liquidation councils, chaired by outsiders, were installed to oversee the strict implementation of the liquidation of the collectives. Not surprisingly, the role and the composition of these institutions were changed when the ex-Communists came back to power (Swinnen 1991a). The 1991 Sajudis government in Lithuania also removed the existing management from its controlling positions and created new institutions, the Municipal Agrarian Reform Services, chaired by outsiders. As in Bulgaria, the re-elected ex-Communist government changed the role and the composition of these institutions in 1993 (Rabinowicz 1997).

Post-reform access to land

Both so-called ‘historical justice’ (i.e., restoration of property rights to pre-collectivization owners) and ‘equity’ (i.e., egalitarian land ownership or access) have been key factors in the political discussions and have strongly affected the choice of policies.3 From the above discussion it is clear that access to land during and after transition for different groups (former owners, collective farm workers, rural households, etc.) differs among CEECs. Access to land for certain groups depends on the choice of the land reform procedure, on the reform implementation, but also on the pre-reform land distribution, the current economic structure, and on the development of leasing and land sales markets.

(p.358) For example, land distribution primarily benefits people active in agriculture, while restitution to former owners may transfer an important share of the land to non-farmers. However, the impact that this has on access to land for various groups also depends on:

  • The implementation of the reforms (see above).

  • The pre-collectivization land ownership distribution. The pre-collectivization land distribution was rather egalitarian, in Bulgaria for example, due to previous land reforms. In contrast, land ownership was more concentrated in Bohemia (Czech Republic) or Albania. Hence, land restitution would have had very different equity effects in these countries.

  • The structure of agriculture and the economy at large at the time of Communist take-over, as well as the speed of structural transformation of the society during the Communist period. Negative equity effects from land restitution are more important in countries with a large present employment in agriculture which had a very skewed land distribution in the pre-Communist period, such as Albania, with 50% of people employed in agriculture, low incomes, and large food security problems, compared to the Czech Republic where incomes are considerably higher and less than 5% of people are active in agriculture.

  • Whether potential farmers can lease or purchase land from the new owners. Land sales have been legally restricted in many CEECs. Leasing is widespread, especially with informal contracts. Formal contracting is conditional on the necessary legislation and government regulations, which are not yet available in several CEECs.

Efficiency implications

Efficiency arguments in reform discussions can refer to various issues, such as timing of reforms (e.g., gradual versus big-bang), distortions caused by the process of privatization (restitution versus vouchers or sales), and various outcomes of the process (e.g., allocative efficiency4 and the impacts on production organizations).5 Here I discuss efficiency aspects of the nature and distribution of property rights induced by the land reforms.

The nature of the property rights

The nature of the property rights that result from land reform have important efficiency implications (Baland and Platteau 1996; Ostrom 1999).6 For example, land reform in Russia and Ukraine (and several other FSU countries) has resulted in the (p.359) transfer of incomplete property rights. The distribution of land shares in Russia and Ukraine awards much leeway to old management and local institutions, opens the way for rent seeking, and prevents efficiency gains by restricting competition for land use, land exchange and/or the shift to individual tenures. This is in sharp contrast to the distribution of land in physical boundaries in Albania that has established clear and strong individual property rights on land. Although, as explained in a previous section, the restitution of land in comparable boundaries transfers a priori incomplete property rights to individuals, the implementation seems to have created much stronger and clearer land property rights in CEECs such as the Czech Republic, Slovakia, and Hungary than the land reform in Russia and Ukraine. The difference in resulting property rights has had a significant impact on growth in agricultural productivity (Macours and Swinnen 1998).

The distribution of the property rights

The distribution of land ownership does not influence efficient land use when markets are perfect and transaction costs are zero. However, in general, land sales markets tend to work imperfectly due to imperfections in other markets such as the credit market (Binswanger, Deininger, and Feder 1995; Sadoulet, Murgai, and de Janvry, this volume; Platteau 1992). These imperfections are reinforced in transition countries. The larger the market imperfections, the more important it is that the reform transfers the land to the most efficient users.

The reform procedure that does this most effectively depends on market imperfections and on characteristics of the agricultural economy (Mathijs and Swinnen 1998b). For example, allocating land to the most efficient users can be done in auctions or, with imperfect credit markets, in voucher-based auctions. However, taking into account the implementation costs of auctions, the best policy might be to lease the land (i.e., auctioning user rights), pending sales, when agriculture's share in employment is small and technology advanced. However, when agriculture's share in employment is large and technology less advanced, equal distribution of land in physical boundaries may be preferable to voucher auctions because the implementation costs of distribution are lower than a voucher-based auction, while resulting in a relatively similar distribution of property rights.

In addition, such land distribution contributes to equity, which may have additional positive efficiency effects, especially under conditions of a large farming population, a low level of technology, and income and food insecurity. If land were unequally distributed, most farmers would not own the land they cultivate. They would have to rent the land or work as wage earners. Both options have important disadvantages (Stiglitz 1993).7 Land rental contracts either force the landless farmer to bear all or some of the risks, while wage contracts provide poor work incentives. With sharecropping arrangements the farmer still has to bear considerable risk, while his work incentives (p.360) are attenuated. This argument is especially relevant in countries where agriculture is still a large share of the economy and where land reform has a strong effect on total wealth distribution.8

Empirically we observe that, taking into account the political constraints as outlined above, these efficiency arguments seem to have affected the choice of land reform policies. Most CECs privatized land that was not to be restituted for political-institutional reasons (between 15 and 25% of TAL) by selling or leasing it (pending sales). However, land use rights were not allocated through auctions, but through the provision of short-term leases for a fixed rent. More specifically, in the Czech Republic, Eastern Germany, Hungary, Poland, and Slovakia, state farmland was transferred to a Land Fund managed by the state, and subsequently leased to individual farmers or farm organizations, pending sales.9 Only a very small percentage of state farm land was actually sold in auctions (or by tender). For example, in Poland, less than 5% of the land in the Land Fund had been sold and 60% was being leased, while the rest was state-managed or in the process of being sold or leased by the end of September 1995 (Organization for Economic Cooperation and Development (OECD) 1996).

In Hungary, collectively owned land was either distributed to collective farm workers and employees or auctioned in exchange for vouchers. These vouchers were allocated to compensate former owners for their lost property. They could also use the vouchers to buy an apartment or a lifetime bond. Although in theory the use of voucher-based auctions should be an efficient policy, some of the key conditions for an optimal mechanism were not fulfilled because first, there was collusion among bidders, such that most land was sold for the reserve price, which was set too low; and, second, in an economy characterized by high inflation and uncertainty, a lifetime bond did not prove to be a credible alternative for the security of land ownership, so that all the beneficiaries wanted to buy land with their vouchers (Mathijs and Mészáros 1997).10

In contrast, in Albania and Romania, characterized by low farm technology and a high share of agriculture in total employment, land was distributed. In Albania, where all land was state-owned, land was distributed on an equal per capita basis among the rural population.11 In Romania limits were imposed on restitution and part of the land was distributed to farm workers.

(p.361) In many cases where governments restituted land to former owners for historical-legal reasons, they have implemented additional measures to restrict the transfer of property rights from the people using the land to the former owners. Examples are the increase of (opportunity) costs for submitting land claims, giving former collectives more rights and decision authority on the use of assets under privatization, and limiting new owners' rights in transferring and using assets. These policy adjustments had both distributional and efficiency consequences. For example, a regulation such as the seven-year moratorium on the withdrawal of land from reformed collective farms in Slovakia prevented the disruption of a highly mechanized and capital-intensive production system. At the same time, it reduced access to land for people wanting to start an individual farm and it distributed rents from them and the new owners to the current management and farm workers. A different example is the limit that was set on the amount of land that could be restituted to former owners in Romania. By distributing the remainder to farm workers, the government wanted to rectify the spontaneous privatization of land at the beginning of reform (Jackson 1997). Such a policy restricts the rights of former owners, but at the same time improves access to land for a large rural population active in agriculture (36.3% of total employment in 1994).

Land leasing

With ownership on much agricultural land transferred to individuals not active in agriculture, exchange of land is important. Sales markets of land are unlikely to provide an efficient solution to the demand for land exchange in CEECs. As argued above, land sales markets generally work imperfectly. In transition countries land sales are further restricted or absent due to missing legislation, or the unwillingness of many owners to part with their newly acquired land. In FSU countries all land sales remain a controversial issue, while in CECs land sales to foreigners are very controversial, blocking land market legislation.

Land leasing is a widespread phenomenon in Western market economies (Swinnen 1998) and is extensively used by highly efficient farms in Europe and the United States. The main benefits of land ownership vis-à-vis land renting are ‘the privileges of wealth’ and improved access to credit with the use of land as collateral (Sadoulet, Murgai, and de Janvry, this volume). However, recent studies on land use and investment incentives in Asia and Africa indicate that secure land-use rights are sufficient conditions for efficient land use and optimal investments by farmers (Brasselle, Gaspart, and Platteau 1998; Feder and Feeny 1991; Rozelle, Li, and Brandt 1998). Further, in developed market economies the importance of land as collateral to get access to credit is limited with the availability of other assets and various institutional arrangements to secure loan repayment.

Therefore a key policy focus should be on land leasing, and on how to regulate and enforce leasing contracts such that they provide sufficient security to tenants for making the necessary investments and sufficient incentives for land owners to lease their land to the best user.

(p.362) Farm restructuring

Observations on farm restructuring

A wide variety of farm organizations, such as producer cooperatives, joint stock companies, limited liability companies, partnerships, and individual farms have emerged in CEECs. Often it is not fully clear what the various names, such as ‘joint stock companies’ and ‘private cooperatives,’ mean. Table 14.3 distinguishes between five production structures depending on ownership and use of assets.

  • Public or state farms which are entirely owned by the state. They have not yet been privatized or will not be privatized because, as in the West, they remain active in public research.

  • Cooperatives are characterized by joint ownership and joint operation of the means of production. They range on average from 475 hectares in Romania to 1,461 hectares in Eastern Germany.

  • Companies include all kinds of enterprise structures (limited liability companies, legal entities, etc.) owned by shareholders. Their average size ranges from 281 hectares in Bulgaria to 823 hectares in Eastern Germany.

  • Partnerships are characterized by joint operation and ownership, but at a smaller scale than companies or cooperatives. Moreover, partners are often family members. They are medium-sized farms of 100 to 500 hectares.

  • Individual farms are farms managed by a single individual or household. These farms typically include both family farms and household plots, and are generally characterized by their small scale: from 1 to 50 hectares. In Eastern Germany, only the ‘single proprietorships’ are classified as individual farms.

In Romania individual farms occupied 61% of TAL, and in Albania, by the mid-1990s, virtually all of the land (95%) was used by small private farmers. In Slovenia, as in Poland, the large majority of land was already used by individual farms under the Communist period. However, the break-up of large-scale agricultural production units into individually operated ‘farms’ is considerably less in the other CEECs, where large-scale farms still dominated by 1994. Cooperatives, partnerships, and companies used more than two-thirds of TAL in Eastern Germany, the Czech Republic, Slovakia, Hungary, and Bulgaria. In the Czech Republic, Slovakia, and former East Germany, most restituted land was leased to transformed cooperatives or to state farms.

Table 14.4 presents calculations of a farm individualization index (FII)—based on the percentage of agricultural land used by individual farms but corrected for the initial situation—for eighteen CEECs (Mathijs and Swinnen 1998a). The FII is low in countries where large-scale successor organizations to the former state and collective farms still dominate, such as Slovakia (5%), Hungary (13%), and the Czech Republic (20%). The FII is highest in Albania (95%) and Latvia (80%) where a massive break-up of the collective farms resulted in a domination of small-scale production units. Within the CEECs there also exists a wide variation in the importance of individual farming of different regions and agricultural subsectors.

(p.363)

Table 14.3. Farm structures in Central Europe in 1994 based on agricultural land

Albania

Bulgariaa

Czech Republic

East Germany

Hungary

Romania

Slovakia

Slovenia

State farms number

13

1,009

239

36

550

262

n.a.

  area in 1,000 ha

n.a.

328

199

b

2,051

444

85

  average size in ha

150–200

325

498

n.a.

3,729

1,695

n.a.

  % of total area

n.a.

7.0

2.8

b

15.5

20.3

10.9

Cooperatives number

2,373

1,468

1,336

2,048

3,970

961

  area in 1,000 ha

2,260d

2,043

1,952

2,306

1,780

1,531

  average size in ha

953

1,392

1,461

1,126

446

1,563

  % of total area

48.2

47.7

35.9

37.7

13.4

69.9

Companies number

142

1,461

1,563

3,311

219

  area in 1,000 ha

40

876

1,286

l,164b

101

  average size in ha

281

600

823

n.a.

459

  % of total area

0.9

20.5

23.7

19.0b

4.6

Partnerships number

47

2,379

2,369

13,741

  area in 1,000 ha

15

1,116

b

1,537

  average size in ha

310

469

n.a.

112

  % of total area

0.3

20.5

b

11.6

Individual farms number

490,000

2,010,961

60,666

22,505

1,203,000

3,579,234

7,759

n.a.

  area in 1,000 ha

n.a.

2,059

872

1,082

2,652c

7,905

115

697

  average size in ha

1.05

1.0

14

48

n.a.

2.21

15

n.a.

  % of total area

n.a.

43.9

20.4

19.9

43.3c

59.6

5.3

89.1

(a) Arable land.

(b) ‘State farms’ and ‘partnerships’ are included in ‘companies.’

(c) ‘Other’ is included in ‘individual farms.’

(d) Including organizations under liquidation.

Source: Swinnen, Buckwell, and Mathijs (1997).

(p.364)

Table 14.4. Farm individualization index (FII), 1995a

Country

FII

Country

FII

Albania

94.2

Kyrgyzstan

23.2

Armenia

81.8

Latviab

80.2

Belarus

15.2

Lithuaniab

60.4

Bulgaria

45.4

Romania

55.2

Czech Republic

22.1

Russia

12.1

Estoniab

37.5

Slovakiab

3.1

Georgia

21.2

Turkmenistan

7.1

Hungary

17.3

Ukraine

14.1

Kazakhstan

0.0

Uzbekistan

13.1

(a) The FII is calculated by dividing the difference between the share of individual farms in total agricultural land in 1995 (IND95) and in 1989 (IND89) by 100 minus the share of individual farms in total agricultural land in 1989: FII = (IND95 − IND89) / (100 − IND89) 100. For all Former Soviet Union (FSU) countries except the Baltic countries, an initial share of individual farms equal to 1% is assumed.

(b) 1994.

Source: Mathijs and Swinnen (1998 a).

While the break-up of state and collective farms into individual farms clearly causes fragmentation in some cases (e.g., Albania), this is not the case in general. In most of the CEECs individual farms cover 100 hectares and more. The Latvian case in particular shows that a high FII (80%) does not necessarily imply a high degree of fragmentation: only 23% of TAL is cultivated by farms smaller than 5 hectares. Most of the land is farmed by farms between 5 and 100 hectares. (See Table 14.5. In general, the data underestimate the average size of part-time and—even more—of full-time individual farms because available statistics often do not distinguish between household plots, part-time farms, and full-time, individual farms.)

The most important factor explaining fragmentation is the size of the rural work force. A high share of agriculture in employment implies a strong demand for small household plots, thus contributing to the fragmentation of land. Figure 14.1 shows an almost perfect linear correlation (regression R 2 = 0.92) between the share in TAL of farms less than 5 ha as a measure for fragmentation, and the share of agriculture in the economy. Additional factors have apparently stimulated the startup of larger individual farms. Finally, since the mid 1990s the share of individual farms increased further in all CEECs, while the share of especially cooperative farms continued to decline.

Factors affecting farm restructuring

Farm restructuring depends on the pre-reform farm structure, on the design of the privatization and transformation policies (itself influenced by political economy factors), on the implementation of the policies, and on a series of additional factors, including the economic environment, affecting the outcome of the reform process. (p.365)

Table 14.5. Degree offragmentation of agricultural production based on land use dataa

Country

Share of individual farms in TALb (%)

Share of farms smaller than 5 ha in TAL (%)

Share of farms larger than 5 ha in TAL (%)

Albania

94

95

Bulgaria

44

30

14

Czech Republic

20

1

n.a.

East Germany

20

n.a.

15

Estonia

40

25

19

Hungary

22

12

10

Latvia

81

23

58

Lithuania

64

33

31

Romania

61

45

16

Slovak Republic

5

2

3

(a) Total agricultural land, 1994.

(b) Own estimate based on the 1994 survey of small farmers.

Sources: Swinnen, Buckwell, and Mathijs (1997); Organization for Economic Cooperation and Development, OECD (1996).

                   Transition from Collective Farms to Individual Tenures in Central and Eastern Europe

Figure 14.1. Relationship between the share of farms smaller than 5 hectares and the share of agriculture in total employment

Note: the curve on the graph is based on a least squares regression.

Source: Mathijs and Swinnen (1998 a).

(p.366)
                   Transition from Collective Farms to Individual Tenures in Central and Eastern Europe

Figure 14.2. Farm individualization index (FII) for Eastern Germany and the Czech Republic, 1989–1995

Source: Mathijs and Swinnen (1998 a).

1. Transition-related risk and adverse terms of trade have negatively affected the creation of individual farms.

Risk has a negative impact on the shift to individual tenures if the collective farm is better at coping with risk than the individual farm, e.g., by risk pooling. This is more likely to be the case in the beginning of transition than in a situation with better functioning markets and developed institutions (Mathijs and Swinnen 1998a). The same reasoning applies for institutional access to credit, accumulated social capital, influence with policy makers, etc. However, for all these factors the benefit of staying in the collective framework is not necessarily positive. For example, banks may be unwilling to lend to debt-ridden collective farms with unclear property rights on assets. Similarly, the influence with policy makers depends strongly on the political preferences of the governing parties. Reform-minded politicians may be more inclined to support individual farms than collective farms.12

Available evidence is, in general, consistent with the hypotheses that high transition risk and falling terms of trade have reduced the shift to individual tenures at the start of transition. The FII remained low in the 1989–92 period, characterized by high price variability and strong declines in terms of trade. Afterwards, the FII increased, as reflected in Figure 14.2. However, other factors have also played a role, such as the fact that most privatization and transformation legislation was only passed in parliaments in 1991 and 1992 in most CEECs. (p.367)

                   Transition from Collective Farms to Individual Tenures in Central and Eastern Europe

Figure 14.3. Relationship between FII in 1995 and initial collective farm productivity in 1989 for six CEECs

Source: Mathijs and Swinnen (1998 a).

2. The break-up of collective farms is strongest for the least productive farms and the most labor-intensive farms.

Figure 14.3 shows how the FII is negatively correlated with gross agricultural output (GAO) per farm worker in 1989 (as a proxy for average collective farm productivity) for six CEECs. Countries with low productivity on collective farms, such as Albania, have a significantly higher degree of decollectivization than those where collective farm productivity was higher, such as Hungary. Furthermore, especially in those countries where productivity on collective farms is too low to provide for the basic needs of members, the members will leave. The issue of relative productivity is thus related to consumption risk, or more generally, food security, reflected in the share of the budget spent on food. In countries characterized by a large share of the budget spent on food, food security is more critical. This factor appears to be important for countries such as Albania and Romania, where extremely low productivity of collective farms, in combination with government policy favoring state farms and taxing collective farms, caused very low incomes on the collective farms. In the case of Albania, where about 70% of income is spent on food, the situation was so extreme that food shortages and hunger resulted, causing a massive break-up of the collective farms after 1991.

Regional (within country) differences in decollectivization are also correlated with productivity differences and scale economies in production. Decollectivization is found to be significantly lower in plains where crop production with scale economies is the main activity. For example, data from Hungary and Romania show a strong (p.368) negative correlation between the percentage of plains in a region and the share of individual farms.

3. The emergence of individual farms is reduced by the costs of leaving the cooperative farms. These ‘exit costs’ are affected by the procedures for withdrawing assets from the cooperative farms and the ownership of the assets. These factors, in turn, are influenced by the privatization and transformation regulations.

The method of privatization and land reform will in this way affect the emergence of individual farms. For example, in the case where many former owners are no longer active in agriculture, restitution of assets to former owners induces a conservation of the collective farm structure compared to a privatization procedure that allocates assets to the collective farm members, such as distribution, because collective farm managers have lower transaction costs than (potential) individual farmers in contracting with new owners. Similarly, share distribution and the resulting imperfect land property rights for individuals are key obstacles for the growth of individual tenures in Russia and Ukraine.

Transformation regulations can also hamper the break-up of collective farms by making it more difficult for individuals to withdraw their assets. For example, Slovenia introduced co-ownership of land between private individuals and state farms. In Bulgaria, amendments to the original land law include the institution of an extended administrative procedure, the possibility of reviewing the restitution process, and several restrictions to sales of land. In Hungary members can leave their cooperative after its transformation but they cannot withdraw their land or non-land assets. They receive a compensation that is only a fraction of the real value of the assets. In Slovakia, cooperatives can issue vouchers instead of restituting assets to former owners, but these vouchers cannot be traded for seven years.

Table 14.6 presents various indicators of reform legislation in CEECs. The shift to individual tenures is stronger where (1) more of the land was distributed to farm workers instead of restitution to former owners, (2) the share of agriculture in employment is high,13 and (3) exit costs are low. It is remarkable to see how the two countries at the extremes of the spectrum are exactly opposite in these three factors. Albania, where FII is highest, distributed all the land to farm workers, and has a high share of agriculture in employment and low exit costs. Slovakia, where FII is lowest, restituted land to former owners, and has a low share of agriculture in employment and high exit costs. (p.369)

Table 14.6. Various indicators of land reform and transformation regulations

Share of total agricultural land (%)

Share of agriculture in total employment (1994)

Man/land ratio (workers/10 ha)

Exit costs due to government regulationsa

Privatized land by

State-owned land (1994)

Restitution

Distribution

Albania

93

3

53

6.8

1

Bulgaria

81

7

22

1.1

2

Czech Republic

79

13

5

0.6

2

East Germany

82

8

n.a.

n.a.

2

Estonia

74

22

8

0.6

2

Hungary

62

19

5

9

0.6

3

Latvia

64

30

2

17

0.9

1

Lithuania

96

21

1

23

1.1

2

Romania

43–58

15–30

13

36

2.4

2

Slovakia

74

20

7

0.7

3

(a) Own estimate of exit costs induced by farm transformation regulations (1 = low, 2 = medium, 3 = high).

Source: Mathijs and Swinnen (1998 a).

Additional factors have stimulated decollectivization in the Baltic countries and especially in Latvia. Becoming independent from Russia has been a key political strategy, affecting their reform policies. Collective farms were partly seen as a segment of a system imposed on them by the Russian occupation. Decollectivization was thus part of their independence strategy (Rabinowicz 1997). These additional factors have apparently stimulated the startup of larger individual farms. Farms larger than 5 hectares have emerged more strongly in the Baltics and especially in Latvia than in CEECs with a similar agricultural share in employment. One explanation is that land ownership in 1945 was less fragmented and more egalitarian than in many other countries. Another important factor is the active Latvian restitution and decollectivization policy, which was inspired by nationalistic motivations. Restitution of land allocated property rights exclusively to native Latvians in a country with a very high share (46%) of ethnic non-Latvians (mostly post-1945 Russian immigrants). Further, the Latvian reform regulations specify that individual farms be given the highest priority in land allocation. The lowest priority is given to reforming collective farms (quite unlike many other CEECs, where collective farms receive preferential treatment).

Efficiency effects

Are individual farms more efficient than transformed state and collective enterprises, such as private cooperatives or joint stock companies (‘large-scale successor organizations’ or LSOs)? In theory, two factors have an important, and opposite, effect on the relative efficiency of these various organizations in agricultural production: labor transaction costs and scale economies. First, LSOs are expected to display lower levels of (p.370) technical efficiency than family farms because of their inherent problems in solving principal-agent problems in labor contracting related to the difficulties of linking effort in production to income (Schmitt 1993; Pollak 1985). Metering effort in production is particularly stringent in agriculture because of its biological and sequential nature and spatial dimensions (Brewster 1950; Binswanger and Rosenzweig 1986). Family farms are more efficient in this regard because family members maximize family welfare rather than individual welfare and hence face no incentive to free ride, so that the costs of monitoring and controlling labor effort are lower (Carter 1984).

Second, scale economies would favor the largest organizations. However, many studies suggest that there are no increasing returns to farm size in production beyond what can be captured by the family farm, both in developing (Berry and Cline 1979; Hayami and Ruttan 1985) and in developed countries (Kislev and Peterson 1991; Peterson 1997). Advantages of cooperation and economies of scale do exist in output marketing, input purchasing, credit and information provision, and risk management. In many countries these scale economies are captured by marketing and credit cooperatives. However, in a transition economy where such cooperatives are typically absent, these ‘intrinsic’ scale advantages may provide important advantages to LSOs and may offset their transaction cost disadvantages, at least during the transition period (Carter 1987; Machnes and Schnytzer 1993; Deininger 1995). Moreover, some argue that state and collective farms performed poorly not because of their intrinsic problems, but because of extrinsic problems, such as bureaucratic controls and extractive external environments (Johnson 1983; Putterman 1985). This result would imply that LSOs would be able to survive and compete as production organizations even after the transition is over.

The first empirical analyses of differences in efficiency between different farm organizations after the 1989 reforms in CEECs yield mixed results.14 Using data from former East Germany, Mathijs and Swinnen (2000) argue that new partnerships, using on average 500 hectares and five workers, and large individual farms are the most efficient farm organizations as they combine maximum scale efficiencies with low labor supervision costs. We also find that the efficiency differences between LSOs and partnerships and family farms have declined during transition, suggesting that hard budget constraints and independent management have induced significant efficiency gains in LSOs.15 Our analyses of farm-level data of Czech and Slovak farms indicate similar results (see case study attached). The calculated efficiency indicators are lowest for the (p.371) largest LSOs and the smallest family farms. However, between these two extremes there exists a wide range of farm sizes and different governance structures where relatively little difference in efficiency can be observed. Still, the calculations also suggest that the cooperative farms are the least efficient, a result consistent with the continuing decline of the share of cooperative farms in land use over the past decade (see above).

However, after reviewing several survey-based analyses of FSU farms, Lerman (1998) concludes that the quantitative data on the relative performance of the various farm structures are inconclusive. Furthermore, Sedik, Trueblood, and Arnade (1997) measure a decline in overall farm efficiency during transition in Russia. Unlike in some CEECs where improved LSO management has followed effective organizational reforms and the introduction of hard budget constraints, Lerman and Csaki (1997), and Sedik (1996, 1997) report that, despite some downsizing in restructured farms, internal reorganization has not produced deep results in countries such as Russia and Ukraine, and that the collective framework has preserved most of its traditional functions. According to recent surveys in the Ukraine and Russia, about half the employees of farm enterprises report that no real change has taken place so far in the ‘reorganized’ farms. These surveys confirm intuitive insights that changes in large farms have been mostly superficial. Also, most managers report that their farm enterprise continues to be committed to a lifetime employment policy for its members, and they do not acknowledge disguised unemployment on their farms. The only real change appears in the abolition of outside imposition of production plans. However, because of informal dependency between large farms and local authorities, production plans continue to be influenced by (local) authorities.16

Transition to individual tenures, land reform, and productivity growth

In contrast to the small efficiency differences between farms within CEECs, differences between CEECs in terms of changes in aggregate productivity of agriculture are large (Macours and Swinnen 1998). While agricultural labor productivity (ALP) has fallen between 1989 and 1994 in most CEECs, it has increased around 40% in the Czech Republic, Slovakia, and Hungary (CSH). This increase in ALP coincided with restitution of land to former owners, a consolidation of large-scale farm structures, and (p.372) a strong decline in output and, even more, in labor input. In contrast, in Russia and Ukraine, ALP declined with around 35% over the same period, although the shift to individual farms was equally limited. Outside CSH, labor productivity increased only in Slovenia and Albania (10–20%), countries with very different adjustment patterns from CSH. In Albania agricultural labor input remained constant, while land was distributed to rural households and a dramatic shift to individual tenures occurred. In Slovenia (and Poland) land reform and farm restructuring was less dramatic. In Romania and Bulgaria, where land was restituted as in CSH and the shift to individual farms was moderate, ALP declined by 10% to 40%. Here, agriculture played a role as an employment buffer with low performance in the rest of the economy.

This suggests that there is no simple relationship between the choice of land reform, the shift to individual tenures, and productivity growth. Instead, the optimal reform and adjustment path differs among CEECs because it depends on the structure and the technology of the agricultural system and on the overall economic development. Some hypotheses on the impact of land reform and the transition to individual tenures on productivity growth are as follows.

First, a condition for growth is that land reform allocates strong and clear property rights on land to individuals (restitution and physical distribution in CECs versus share distribution in Russia and Ukraine). Furthermore, the nature of the property rights is more important than the distribution of the property rights, even in transition countries. In fact, ALP growth is strongest in those countries where an important share of the land is allocated to individuals not active in agriculture.

Second, the impact of the shift to individual tenures depends on the factor input and technology of the farms. In capital-intensive production systems, such as CSH, the costs from disrupting the capital stock and breaking up the large-scale technology may outweigh the benefits from improved supervision and labor effort on individual farms. In contrast, in labor-intensive farming, such as Albania, the incentive problems are likely to outweigh costs of technology disruption with the break-up of collectives.17 Therefore, in labor-intensive production systems, productivity growth is more likely to come from the shift to individual farms, while in capital-intensive systems, important productivity improvements may come from improved LSO management. However, the latter requires effective organizational reforms, including the introduction of hard budget constraints. In those CEECs where LSOs seem to operate relatively efficiently they have undergone substantial effective restructuring, including both management reform and operation adjustments.

Third, land reform and farm restructuring need to be complemented by other institutional reforms to improve access to land, credit, technology, and information. The role of land leasing was already discussed above. Another important contracting problem in transition agriculture is credit. Only part of this is due to the shift to individual tenures. Credit constraints have been severe for all farms. Finance and credit problems result, among other problems, from the reform of the banking sector and (p.373) the transition problems of enforcement mechanisms to ensure loan repayments (Swinnen and Gow 1999).18

The rural finance situation is improving in some CEECs due primarily to two factors: (1) improved profitability in agriculture since 1995, and (2) the emergence of institutional innovations, such as credit cooperatives, leasing, and various forms of contracting between farms and the up- and downstream sectors. The contracts can take various forms, e.g., leasing of equipment, forward contracting of output deliveries in return for inputs and working capital, producer loan guarantees backed by processing companies with delivery contracts, the provision of commodity loans to contracted farms by processors and input suppliers, warehouse receipts, etc. All of these contractual arrangements somehow address the loan collateral problem, and the credibility of future cash flows for loan repayment, and play an important role in improving access to credit for farms.

Foreign direct investment (FDI) in up- and downstream sectors has also contributed to solving credit and contract enforcement problems at the farm level. In some cases FDI has induced dramatic increases in productivity as it simultaneously tends to solve problems of access to credit, information, management advice, and technology (Gow and Swinnen 1998). Further, once one company successfully introduces such institutional innovations, there is an important spillover effect to other enterprises and even other sectors.

In conclusion, complementary institutional reforms are necessary to solve contracting problems in the agro-food chain and thereby, access to credit, information, technology, land, etc., for farms are requirements for sustainable productivity growth. The form of the institutional solutions—such as the role of leasing or of cooperatives for purchasing inputs, credit supply, and marketing—will differ for the large-scale farms in CSH, the small fragmented holdings in Albania and Romania, and the part-time family farms in Poland and Slovenia. Not surprisingly, in those CEECs where ALP has increased most, complementary institutional reforms and innovations, such as leasing of land and equipment, forward contracting, etc., and also the inflow of FDI, have progressed most.

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Notes:

This chapter presents insights based on research financially supported by UNU/WIDER, the Foundation for Scientific Research (FWO) and the European Commission. Erik Mathijs has contributed extensively to the research and insights presented in this chapter. I also thank Karen Macours, Hamish Gow, Azeta Cungu, Jason Hartell, Stefan Bojnec, and Marvin Jackson for research collaboration, and Alain de Janvry, Elinor Ostrom, Zvi Lerman, Alexander Sarris, Marian Rizov, Sophia Davidova, Allan Buckwell, Konrad Hagedorn, Csaba Csaki, and many others for discussions and comments on the issues discussed in the paper. The views expressed here do not necessarily reflect those of the European Commission.

(1) I follow Barzel's (1989) definition of property rights of individuals over assets, including the rights, or the powers, to consume, to obtain income from, and to alienate these assets. Legal rights, as a rule, enhance economic rights, but the former are neither necessary nor sufficient for the existence of the latter.

(2) In some cases governments have intentionally slowed down and hindered the land reform implementation. Both de Janvry (1981) and Hayami (1991) argue that one of the most important factors in explaining worldwide land reform failures is that the ruling class, which opposes reforms, will concede to reform pressures only for the sake of legitimizing their dominance (i.e., de Janvry's ‘Conservative Model’). When political crises occur, the ruling order will ‘allow’ land reforms to take place because the likelihood of remaining in power without some reform has declined with the chance that a lack of reform will increase the potential of a revolution. By allowing limited reforms, it is hoped that the pressure for more substantial reforms is reduced. Hence, in this perspective, land reform programs are expected to be as limited as possible while achieving their political purpose. A typical way of achieving such an objective is to deliberately choose a reform process with complex rules and insufficient means to execute it.

(3) The design of transformation policies also has distributional implications. It will, for example, influence the ability of current management to remain in charge of the transformed cooperative farm. It will also affect the chances for current employees to remain employed or to become private individual farmers. Transformation policies will therefore influence the distribution of future income streams and economic rents.

(4) Furthermore, Schumpeter (1942), Hayek (1945), and, more recently, North (1990) and Williamson (1991) argue that allocative efficiency is less important than efficiency in change and adaptation. There is no a priori reason why both should coincide in institutional choice; in fact a trade-off may exist (Williamson 1991).

(5) For example, many experts argued that restitution of land in historical boundaries is an inefficient land reform procedure because it was assumed to cause disruptions of the farms with strong ownership fragmentation and allocation of land property rights to people not active in agriculture—a view disputed by Mathijs and Swinnen (1998 a). Here inefficiency does not refer to the nature of land ownership but to its impact on the farm structure.

(6) For related discussions on the role of private ownership for market economies, see Vickers and Yarrow (1991), and for the effective conduct of stabilization policy, see Hillman (1992) and Hinds (1991).

(7) Stiglitz (1993) argues that, in general, the more equally distributed property rights are, the better society's incentive structure is likely to be, because, while incentive problems arise both in the capital market and in the labor market, the labor incentive problem is more important, and unequal wealth (land) distribution induces inefficient labor contracts.

(8) Land ownership inequality may also have negative implications on economic growth as it fuels social discontent and political unrest. Socio-political instability may reduce economic growth in two ways. First, socio-political instability increases entrepreneurial uncertainty, which may result in low investment and capital flight, and hence reduce growth (Alesina and Perotti 1992; Perotti 1994). Second, if the governing coalition is insecure, its continuation may depend on the dispensation of patronage, which could drain the economy of its productive potential (Binswanger and Deininger 1995). These arguments are contrary to the older view that inequality of income increases economic growth because people with higher incomes will save relatively more. An unequal income distribution hence increases investment (Kaldor 1956).

(9) In Eastern Germany the Gattermann proposal to privatize land through auctions encountered much opposition and was not accepted (Hagedorn 1997).

(10) In terms of auction design problems, the reservation utility was not high enough to ensure incentive-compatibility of the auction scheme (Mathijs and Swinnen 1998 b; Vickrey 1961; McAfee and McMillan 1987).

(11) However, the pressure to change land reform policies, from former owners whose land was not restituted, has created uncertainty of property rights. The uncertain nature of the property rights limits transactions of and investments in land (see attached case study).

(12) Preliminary evidence indeed suggests that government support, ceteris paribus, is higher in sectors with more small-scale family farms (Swinnen 1996).

(13) The share of agriculture in total employment for CEECs is positively related with FII because, first, the share of agriculture in total employment is typically negatively correlated with the level of development and the use of technology in agriculture. A country with a high share of agriculture in employment is typically less developed and uses inferior technology compared to a country with a low share of agriculture where there was a substitution of labor by capital as a result of the technological progress. Second, a high share of agriculture in total employment is an indication that relatively few people have left agriculture. Recent World Bank surveys suggest that the overwhelming majority of individual farmers are former cooperative members or employees of state farms (Csaki and Lerman 1996). Since in general outsiders lack the appropriate skills to start up a private farm, the number of farm workers is a good reflection of the number of people actually interested in individual farming.

(14) Pre-1989 comparisons of small-scale family farms and large-scale collective (or state) farms in Poland and Yugoslavia also yield mixed results. Boyd (1987 a, b) and Brada and King (1993) argue that there is no difference in technical efficiency between state farms and private farms and conclude that ‘it is the environment of socialized agriculture rather than the socialized nature of farms that leads to the poor performance of the agricultural sector in Eastern Europe and the former Soviet Union’ (Brada and King 1993: 54). Hofler and Payne (1993) disagree based on their Yugoslavia study.

(15) In 1995 individual farms occupied 21% of total agricultural land, partnerships 22%, and LSOs 57% (34% cooperatives and 23% companies) (Beckmann and Hagedorn 1997). Partnerships were mostly established as new enterprises. They typically result from the collaboration of only a few people (five labor units on average) that in many cases are family related. Their average size is 500 ha of land.

(16) There is no pervasive intervention in the production plans of farm enterprises, except in the case of strategic commodities, such as cotton in Turkmenistan and Uzbekistan. Farms are allowed considerable independence in their production and marketing decisions. Yet old habits die hard, and there is a strong informal chain of dependency and ongoing consultation between managers and the district bureaucracy. Managers cannot ignore the goals and objectives of district authorities, and, in this sense, they are not free to adjust their product mix completely in response to market signals. One of the most glaring examples is the relatively slow decrease of livestock production in farm enterprises; although livestock has been unprofitable in recent years, and the new private farmers indeed have changed their orientation to emphasize crop production, managers of large farms cannot afford to ignore the traditional insistence of district authorities on maintaining the herd as ‘a source of milk for our school children’ (Lerman 1997).

(17) Furthermore, terms of trade and output have declined less strongly in Albania than in other CEECs. As such, Albania's transition pattern is similar to that of China and Vietnam (Macours and Swinnen 1998).

(18) Agricultural and rural credit and risk markets in the most advanced countries work imperfectly, largely due to imperfect and costly information (Stiglitz 1993). In addition to these ‘normal’ imperfections, a series of specific, transition-related problems have further constrained the financing of the Central and Eastern European agricultural economy since 1989. These transition-specific problems have to do with the role of credit in the economic system, the institutional reforms occurring within the financial system, the declining profitability in agriculture, accumulated debts, high inflation, risk and uncertainty, and collateral problems (Calomiris 1993).