Political Economy of Agrarian Reform in Central and Eastern Europe

Johan F.M Swinnen

• Publisher: Routledge
• Year: 2018
• Topic: Social Sciences
• eBook ISBN:
  9780429821530
• Subtopic: Political Economy
• Index: Social Sciences

First published in 1997, this volume responds to the challenges faced in post-Communist Eastern Europe in the privatization and decollectivisation of agriculture. The contributors feature specialists in agriculture, finance, economics and political science. They begin with discussions on the political economy of privatization and a historical overview and continue with thoughts on agricultural decollectivization in twelve countries across Eastern Europe including Albania, the Baltic countries, Bulgaria, Slovakia and Hungary. The project reflects the basic framework of endogenous institutional change and policy analysis, and uses a political economy framework to explain and interpret these agricultural trends.

1
Political economy of privatization and decollectivization of Central and East European agriculture: Definitions, issues and methodology

Ewa Rabinowicz and Johan F. M. Swinnen

Introduction

Privatization of property rights and transformation of the production organization have been two key decisions in the agrarian reform process for all Central and Eastern European countries (CEECs). Policymakers have had various strategic options to choose from. Their policy choices have important and long-lasting economic and political implications and have therefore been the subject of intense political debate. One could argue that there has been relatively little discussion about the need for private ownership to improve allocative efficiency in the economy. The main issues in these debates have been (a) who would be the ‘new’ private owners of agricultural assets, and (b) what farm structures should replace the state and cooperative farms.¹ These have been sensitive issues, fueled by the perceived danger that assets might fall in the wrong hands or the future performance of agriculture be impaired.

The purpose of this chapter is to define some fundamental concepts related to this debate to identify and discuss the key issues, and, finally, to sketch the theoretical framework underlying the country studies in the chapters that follow.

Definitions

Barzel (1989) defines property rights of individuals over assets as ‘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 Furthermore, the rights people have over assets are not constant. Such rights are a function of the owners’ direct efforts at protection, of other people’s capture attempts, and of government protection. Obligations or responsibilities, which in some cases are imposed by government regulations or by traditions, also contribute to the relative nature of property rights.

This specification of property rights has implications for the analysis in this book. In most CEECs, in contrast to the former Soviet Union, land in collective farms was still formally owned by individuals who had joined collectives during collectivization or by their heirs. However, these formal owners had virtually no authority over the use of the land. This fact provides a good illustration of legal ownership rights not being a sufficient condition for the existence of effective property rights.

Privatization in the CEECs has had to do more with the transfer of property rights than with (legal) ownership rights. In most cases, privatization concerns the allocation of both legal ownership rights and effective property rights to individuals or private institutions. Privatization can occur by various methods - for example, free distribution of assets, sales of assets, usufruct divestment, or restitution. Most of these methods allow for specific groups to be targeted and encompass various technical options. For example, sales of assets can be by general auctions or by in-house sales to workers or management. Different methods of privatization can also be combined by allowing various means of payment at sales, such as general vouchers (part of a mass privatization package), special vouchers valid only for a particular enterprise (distribution to workers), and cash. A combination of different means of payment was applied for example in the privatization of collective farm assets in Lithuania.³

Property rights are fully restored only if all three rights (user, income, and alienation rights) are given to the owners. Not all privatization schemes fullfil these criteria. For example, farms created on a usufruct basis in the Baltic countries had no right to sell the land. Another example of incomplete property rights is the land restitution implementation in several CEECs which specifies that an ‘equivalent’ piece of land be given to individuals wanting to retrieve their land from the (reformed) collective farm. Important transaction costs are involved in the assignment of an ‘equivalent’ or ‘comparable’ plot of land. The plot has to be assigned by the management of the reformed farm. The claimant can go to court if he disagrees with the assignment. Ex ante property rights that are restituted are clearly incomplete in this process because of the high transaction costs. Whether the process generates full property rights ex post depends on whether the claimant is actually able to successfully retrieve the property and use it according to the three criteria mentioned above.

From this perspective, one should be careful in interpreting the data on ‘private’ assets in CEEC agriculture since the transition. In some cases, neither legal (ownership) rights nor property rights are private; in other cases, land titles have not yet been distributed, but new owners are already determining what is being done with the assets and have acquired some property rights. In other cases, ownership rights have been transferred to individuals, but private property rights are incomplete because owners have only limited power over the use and transfer of the assets.

Restitution is a form of privatization that returns property rights to those defined as ‘legitimate’ owners. Restitution of assets is limited by the fact that many original assets no longer exist. The main exception is land and real estate. However, land has sometimes changed dramatically in qualitative terms. Plots that had little infrastructure might now have drainage and irrigation facilities or even buildings on them. The collectivization process, moreover, often resulted in a consolidation of fields, in a new infrastructure, and in the destruction of old buildings and roads and the construction of new ones. Plots of land which prior to collectivization were adjacent to a road might now be in the middle of a vast grain field. The social infrastructure has changed as well. Plots previously located close to villages might now be far away. Such change in quality and use of land creates administrative difficulties in restituting land to previous owners. It also induces compensation claims. Nonlandowning members and management of collective farms often claim that they should be compensated if the quality of the land has been improved and the land is restituted to its previous owners.

Transformation refers to the conversion and restructuring of collective and state enterprises into enterprises compatible with a market economy. This is, in part, a legal conversion and, in part, an organizational restructuring of the entities into viable business units. The available options are specified in laws and typically include conversion of collective and state farms into joint stock companies, limited liabilities companies or producer cooperatives. Transformation includes management reform to increase efficiency (for instance, by creating profit-oriented subdivisions). Farm restructuring can involve enlargement of subsidiary plots, separation of individual farms from collective farms, or a complete dismantling of large farms (Csaki and Lerman, 1994). A useful definition of decollectivization is Pryor’s (1992):

the breakup of large-scale farms, organized either as cooperatives or state enterprises, into individually operated farms and their creation as autonomous production units independent of the government. A change of ownership of these farms, for example, a conversion into a cooperation in which the workers or others hold stock but the essential farming operations remain roughly the same, is quite a different matter and can occur with much greater ease.

Transformation and, in particular, decollectivization - the creation of individually operated farms - can be encouraged or discouraged by the government. The process is directly affected by laws, that provide explicit rules for designing the transformation. Facilitating farmers to withdraw from agricultural production cooperatives can be done through various incentives, for example by providing individual private fanners with preferential credit arrangements (e.g., low interest credit and loan guarantees), by canceling their share of the collective farm debt, or by providing training and extension facilities to support the development of individual farming. Some countries have included a series of regulations that tend to discourage farmers from leaving the cooperatives. We refer to the set of government policies and regulations which attempt to influence process as the transformation policy or decollectivization policy.

Transaction costs and economic efficiency

Privatization and economic efficiency

The classic argument for privatization and restoration of property rights is that the allocative efficiency of the productive assets will increase under private ownership. Private ownership allows market transactions to take place and provides the basis for value maximization of assets. Without privatization, market trades are inhibited by the absence of property rights, and decision-makers who are not true residual claimants of profits lack incentives to monitor production and use resources efficiently.⁴ An additional argument is that the effective conduct of stabilization policy requires privatization (Hillman 1992; Hinds, 1991). Relationships between ownership, incentives, and efficiency are complex (Vickers and Yarrow, 1991). The change of ownership in CEECs does not guarantee efficiency. Lack of knowledge and experience by management as well as insufficient control by new owners can minimize improvements in performance.

In discussions about privatization, the concept of economic efficiency can also relate to the timing of reforms (see, e.g., the discussions on gradual versus big-bang approches).⁵ Efficiency is also used when discussing the distortions caused by the process of privatization (e.g., restitution versus vouchers or sales) and in discussions on the outcome of the privatization process, that is, the optimality of the resulting farm organization and structure.⁶ It is often argued that the redistribution of land according to historical boundaries is inconsistent with the goal of efficiency, where efficiency does not refer to the general goal of private ownership but to the resulting optimal farm structure.

Privatization, transformation, and transaction costs

Privatization and transformation as defined in the preceding section are two different concepts. The former relates to change in the ownership and property rights structure, the latter to the organization of assets for productive use. A fundamental issue is how the two are related. The answer depends on the precedence of transaction costs.⁷ More specifically, the potential for the existing management to keep their production entity similar to its preprivatization state after property rights to agricultural assets have been assigned to individuals depends strongly on (a) how the privatization process affects transaction costs for the various partners (legal owners, potential users) in a potential exchange of the assets, (b) transaction costs involved in monitoring the reform implementation, and (c) incentives for individuals to start an individual farm and leave the cooperative farms (Mathijs and Swinnen, 1996a).

Without transaction costs, it does not matter, from an efficiency point of view, who owns the assets because assets will invariably be used where their marginal return is highest.⁸ In such a world, the privatization process, as long as it turns all ownership rights over to private individuals, might not affect the farm structure and the transformation process beyond the change from a socialist to a capitalist mode of production.

With positive transaction costs in land and asset markets, the transformation process will be affected by the privatization process. The main reason is that by allocating to individuals the private property rights to production factors used by the farms, the farms must then set up (formal and informal) contracts with those individuals for the use of the assets. Property rights are uncertain during a transition period, increasing the difficulties and uncertainties for farms in the use and allocation of their production factors. These difficulties and uncertainties increase when information is less available and transaction costs are higher. The privatization process will have an important impact here. Disruption (in terms of increasing information costs and other transaction costs) is higher for restitution of production factors to former owners, and more so if the land is restituted according to historical boundaries and if the initial distribution is very fragmented. Voucher privatization and sales have a less disruptive effect.

Problems arise on both sides of the market. New (or potential) owners have difficulties selling or renting their restituted land. Monitoring the restitution process and searching for the best potential use of the land can be costly for an individual who is not closely involved in the collective farm. These costs tend to stimulate disruption in the production system and its structures. Thus, with positive transaction costs, privatization and transformation policies are not independent.⁹

Transaction costs and imperfect (asymmetric) information in reform implementation may have a negative effect on decollectivization. The implementation of transformation policies takes place at the decentralized level by special institutions, such as collective farm transformation councils. Those institutions are often influenced by local preferences and biased towards the interests of management and employees who are closely involved in the decisions and activities of the institutions. In the areas of information and monitoring, management and workers of the collective and state farms have an advantage over the dispersed (often urban) asset owners. The higher the transaction costs, the more the current management will be able to reorganize the farm according to its own preferences.

The role of land and input markets

Restitution according to historical boundaries typically leads to an ownership structure that mirrors the (very) fragmented pre-World War II land distributions (see Mathijs, 1997). This fragmentation is exacerbated by the creation of private plots based on private gardens under the Communist regime. Moreover, nonland assets have often been privatized differently, predominantly distributed to the former members of the collective farms. What implications have fragmentation and lack of coordination in the privatization of different types of assets on the outcome of the process of transformation? In this discussion, one should be careful to distinguish between (initial) asset ownership and asset use. In a world of perfect markets, (i.e., a world without transaction costs, information costs, and other distortions), asset ownership and use can be perfectly separated. For example, in some Western countries farmers do not own most of their land,¹⁰ but rent it. In addition, initial landownership does not necessary imply continued ownership, because land can be sold and bought. According to these arrangements, the land markets or the market for rental services of land, machinery, or feed purchase can solve the problems of land fragmentation and confused asset ownership. What is necessary for the CEECs is to establish clear property rights and well-functioning markets.

A first comment on this argument is that it is taking a long time for land titles to be distributed in Central and Eastern Europe. Verify...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Tables
• Contributors
• Preface and Acknowledgements
• Abbreviations
• 1 Political economy of privatization and decollectivization of Central and East European agriculture: Definitions, issues and methodology
• 2 An historical overview of Central and Eastern European land reform
• 3 Agricultural privatization and decollectivization in Albania: A political economy perspective
• 4 Political economy of agricultural privatization in the Baltic countries
• 5 On liquidation councils, flying troikas and Orsov cooperatives: The political economy of agricultural reform in Bulgaria
• 6 Process and politics of agricultural privatization in the Czech and Slovak republics
• 7 The politics and policies of privatization of nationalized land in Eastern Germany
• 8 Process and politics of agrarian reform in Hungary
• 9 Political economy aspects of Polish agrarian reform
• 10 Political economy of agricultural reform in Romania
• 11 Agrarian reform in Post-Soviet Russia
• 12 Privatization of Slovenian agriculture: Process and politics
• 13 The choice of privatization and decollectivization policies in Central and Eastern European agriculture: Observations and political economy hypotheses