Russian Agrarian Reform -- Credit and Subsidy Policy

Radical agrarian reform of the type that has occurred in China, Vietnam, Albania, and Armenia, does not appear to be on the horizon in Russia.[1] Consider, for example, that in January 1991 the president of Armenia launched a major land reform program, and by December of that year 715 out of 812 state-owned farms had been re-organized into 167,000 individual farms and 9500 private cooperatives.[2] In December 1991 President Yeltsin issued the decree "On Immediate Measures for Implementation of Land Reform." This decree required state-owned forms to re-register as a new organizational form. The organizational possibilities ranged from individual farms to a limited partnership in which all the state or collective farm's land and asset shares would be pooled. A political battle developed because the options did not include re-registering as a state or collective farm, and in March 1992 this form of re-registration was allowed. As of October 1993, 34% of state-owned farms had re-registered under their former status, 46% had re-registered as limited partnerships, and only 12% had re-registered as cooperatives or farmers' associations.[3]

One explanation for the resistance to change in the rural areas of Russia is cultural: communal rights and collective responsibility are an enduring feature of the Russian countryside. In accounts of the development of market economies in Western Europe, a similar argument was often used to structure that history as a struggle between rural communalism and the extension of markets. Peasants clung to old institutions and traditional ways of doing things. Rural political and economic elites struggled for agricultural development through consolidation, privatization, mechanization, cash crops and integration into national markets.

Recent work in Western European history has strongly challenged this traditional story.[4] An account has emerged of peasants supporting markets and private property in conflict with elites who promoted collective property and confiscatory procurement systems. A historian of rural France before the French revolution has declared, "In contrast to what historians have generally assumed, the wealthiest segments of the village community proved the most devoted to communal lands and the poorest the most opposed."[5] The key point is that ambiguous property rights and extensive government support for agriculture are in the interest of those who control the political process.

The failure of agrarian reform in Russia is at least in part evidence of the political power of rural elites and the economic return that they enjoy from that power. As one leader of a local association of peasant farms explained,

Yeltsin's decree on the purchase-sale of land will not work, as the majority of present laws and decrees are not working. Why?...Because today is planted a dictatorship not of laws but of power. If the rayon general-governor wants to oppress me -- let there be no doubt he will do so, and there are no laws that can save me. Everything is as it was before: if the first secretary of the city wants to remove me, he will remove me.[6]

The connection of the representatives of agrarian interests to Soviet-era political structures is obvious. The career of Vasilii Starodubtsev is illustrative. Under the USSR he was head of the USSR Peasants' Union, a semi-official body that farm managers and bureaucrats dominated. He participated in the group that staged the August 1991 attempted coup and is now a leading figure in the Agrarian Union, the party that purportedly represents rural interests. One does not need a strong theory of the "true" or "objective" interests of the rural masses to suspect that he does not effectively represent them.

In any case, active discussion, debate and experimentation is crucial for the articulation of rural interests and for stimulating the process of rural development. Thus the development of local democracy is crucial. After the August 1991 coup, Yeltsin received the right to appoint regional governors until regional elections took place. The "democrats," fearful that they would lose in the majority of regions, had these elections postponed. Local elections still have not taken place. Attempts to divide Russian political actors into democrats and non-democrats and promote democracy by promoting the fortunes of particular individuals and political groups have failed dramatically. A highly damaging result of the attempts is that federal support for the democratic process at the regional level is wholly lacking.

Local democracy itself will not be enough to bring about institutional change and rural development. Local stakes in the process of local economic development need to be raised. This can be pursued in two ways. First, the potential return to rural development can be raised by economy-wide reforms at the federal level. This means macroeconomic stabilization, reducing domestic regulation, reducing taxes, liberalizing foreign trade, and promoting privatization. Such reforms raise the return to rural development by increasing opportunities. Second, the economic return derived from existing political structures needs to be cut. This means that subsidies and state-directed credits for agricultural enterprises need to be cut.

This paper will examine how agricultural credits and subsidies have affected agricultural reform in Russia. The first section will consider the role of government subsidies in the effort to promote private farms. The second will consider the impact of state procurement and state procurement subsidies on the development of marketing and distribution channels. The third section will look at subsidies that cover part of the cost of agricultural inputs. The final section will examine general producer subsidies and their relationship to agricultural output adjustment.

Overall, the attempts to support agriculture through subsidies and credits have limited rural development and contributed to weak, inefficient agriculture. Credits for individual farmers have not been structured to promote the success of efficient farmers. Input and procurement subsidies have strengthened the privileged position of enterprises with connections to the government, and producer subsidies have encouraged high-cost producers who can claim a more pressing need for additional funds. Such outcomes are not unexpected or distinctive to Russia. They are consistent with outcomes observed in a considerable body of world-wide experience.[7]

While agricultural policy in Russia had been poorly structured and largely unsuccessful, some basic trends have helped to create forces for change. The first is that state tax revenues have been falling, and hence the spending capacity for agricultural policy has been falling. Total federal transfers to agriculture fell from 10% to 4% of GDP from 1992 to 1993, and budgeted transfers for 1994 are about 2% of GDP.[8] Thus the government's budgetary difficulties have helped to constrain the implementation of ineffective agricultural policies.

The second force for change in agricultural policy is the increasingly obvious breakdown of the executive capacity of the government. The increasing executive difficulties reduce the "security" associated with traditional state institutions and reduce the return to the pursuit of support under government agricultural policies. Such support, even if promised, is often not delivered, and side payments to facilitate the fulfillment of state programs have been increasing. Such implementation failures may over time reduce political support for federal agricultural programs and encourage private rural initiative.

I. Promoting Private Farming

While personal subsidiary plots have long played a key role in Russian agriculture, legislation enabling independent private farms was enacted only in December of 1990. This legislation provided three means for the formation of private farms. One is that a member of a collective or state farm could claim his or her share of land and equipment from the collective and exit to form a small farm. State and collective farms were also required to turn over of portion of their "underutilized" land to the local Soviet. This land is to be distributed to other persons who wanted to become farmers. Persons who want to become farmers can also buy land from the state or lease it from other owners.

In addition to providing enabling legislation, the Russian government also provided subsidies for private farmers. In the spring of 1991 the Russian government provided a billion rubles to the newly formed Association of Peasant Farms and Cooperatives (AKKOR) in order to promote the development of independent farms. These funds were used in part to build up AKKOR, which set up a central office in Moscow and affiliates in all the regions of Russia. Budgetary funds and credits were also distributed to the regional affiliates based on their number of farmers and acreage that that farmers held. The governing committee of the local affiliate made the ultimate decisions about the allocation of credit.

The availability of credit probably played an important role in the growth of the number of farmers. The nominal volume of federal support for farmers increased sharply in 1992, as did the number of farmers (see Table 1). In 1992 the amount of credit allocated through the Farmer Support Fund, an AKKOR affiliate, amounted to Rb 430,000 per farm. This credit was issued at 7% interest per year. About 60% of the credit was one-year credit and 40% was five-year credit.[9] In light of the very high inflation rate (1800% in 1992), this credit was virtually equivalent to a subsidy. Given that the monthly industrial wage in mid-1992 was about Rb 6000, there was a substantial financial incentive to become a private farmer.

Table 1

State Support for Independent Farms

year

# of farms (ths.)

budgetary subsidy

central credit

CPI

real sub. per farm

real crd.

per farm

1991

24.5

40.8

1992

129

14.5

29.3

42.1

1993

258

288

145

0.59

7.7

1994

286

127

886

0.50

Notes and sources: Subsidy and credit figures are in blns. of Rb Real subsidy and credit figures are ths of 1991 Rb per farm. The figure for number of farms is a mid-year (1 July) figure. Budgetary subsidies are from personal communication, Freinkman, Government Financial Transfers, Table 2, and Rossiickie vesti, 6 July 1994. The budget figure for 1994 has been multiplied by .51, the implementation factor from 1993. Central credit figures are from the Russian Farmers' Fund, where the 1993 figure has been scaled up from a year-to-date figure for 20 Sept. 1993.

Credit appears as a major item in the operating balance of the new independent farmers. Table 2 shows a simple operating balance for farmers based on large surveys at then end of 1992 and 1993.[10] The ratio of credit to gross revenue was 1.8. This heavy role of debt is exactly the opposite of what would occur under a market-oriented competitive development of farming. Since information on the performance and credit worthiness of the new farmers is lacking, effective credit institutions would provide small amounts of credit and build upon accumulated performance information to expand credit to successful farmers. In addition, more pressure for self-financing would help to insure that farmers who were able to generate cash-flow from farming were the ones who expanded.

While the volume of credit received in 1993 fell in real terms, a larger share of credit appears to have been mobilized privately. In 1992 the average volume of credits that farmers received was 67% of the volume of credits issued through AKKOR, while in 1993 this figure rose to 134%. This shift suggest that private rural credit markets are developing. One would expect such markets to provide short-term credits, and in fact the share of short-term credits in the credit that farmers received rose significantly in 1993 (see Table 2). A small amount of evidence from China indicates that private credit in agriculture is about twice as large as the sum of that from the state agricultural bank and agricultural credit cooperatives.[11] Taken together, the evidence at least suggests that the possibilities for private credit arrangements for agriculture should not be ignored.

Table 2

Average Farm Balance Sheet

1992

1993

gross receipts (ths. Rb)

226

1800

gross expenses (ths. Rb)

358

1700

credit received (ths. Rb)

408

1500

credit received (in '92 Rb)

408

150

long-term credit (%)

73%

47%

size of survey

40542

60000

Source: Goskomstat.

Since 1992, a rising failure rate among independent farmers and dramatically slowing growth in the number of independent farms has accompanied the fall in federal support. Table 3 shows that failure rates have tripled among independent farmers since 1992. The problem is not that these failure rates are too high -- given that independent farming is a new and risky activity, one would expect significant failure rates. The problem is that the program to support independent farming has made state support the central feature of whether or not the farmer begins farming and whether or not the farmer has a positive cash flow.

Table 3

Farm Failure Rates

period

# of failed farms in period

% of active (end of period)

1992

5118

2.8

1'st half, 1993

5800

2.2

2'nd half, 1993

8300

3.1

1'st half, 1994

12100

6.6

Source: Goskomstat.

While it may be possible to give some land to every person who wants to work the land, certainly it is not possible to provide "sufficient" start-up capital to everyone who would like to become a farmer. The issue of who would be provided with start-up capital, and how state support would be divided between setting up new farmers and supporting already established farmers, was never openly addressed. This is not surprising, since such a question would focus on the allocation of capital within AKKOR, and hence be divisive.

A typical way of avoiding the issue was to treat it as an issue of technical expertise. As one Russian academic put it with respect to land distribution, "...not everyone has the right to land, but only the best of the best, those who are experienced and who are trained professionals."[12] Such a view ignores the issue of who decides who is skilled and appropriately trained. An independent farmer is first and foremost a small business person. A major problem of post-communist economic transformation is that small business was systematically and effectively repressed. It is not possible or desirable to use the past to try to identify who will be successful in a future that must be much different from the past. Rather than obscuring a basically political process with hazy notions of expertise, the goal must be to develop a market process in which effective farmers can be identified because they have survived and earned profits.

In order for AKKOR to grow and to promote effectively private farming, it needs to shift away from distributing federal subsidies to a new, more market-driven mission. AKKOR's comparative advantage, as a Moscow-based bureaucracy serving a far-flung constituency, is in providing products with low transport costs and large economies of scale. A key example of such products are information products that can be replicated and distributed on electronic media. AKKOR already supports two journals containing articles of interest to farmers. AKKOR could expand its media offerings by providing software training tools for farms and agricultural product processing, and databases of information about agricultural input purchasing, irrigation techniques, new crop and seed varieties, and product marketing channels.[13]

II. Procurement Credit and the Marketing of Agricultural Products

A characteristic feature of communist agro-industrial development is an obsession with production and underdevelopment of agricultural product processing, distribution, and marketing. This is evident in cross-country comparisons of food production costs allocated to sectors (see Table 4). As compared to the U.S., the share of agricultural production cost in total food production costs in the USSR was more than five times greater than the share in the U.S., while the share of processing and marketing costs was almost four times lower. A key task for agricultural reform is to foster rapid, market-based development of agricultural product processing and distribution.

Table 4

Sectoral Breakdown of Food Production Costs

(% of total food cost)

sector

U.S.

Britain

France

W. Germany

USSR

supply &

services

33.0

24.0

22.7

23.8

20.0

production

12.0

16.2

38.0

22.0

65.0

processing

& market'g

55.0

59.8

39.3

54.2

15.0

Source: Litvin, Soviet Agro-Industrial Complex, p. 17, cited in Edward C. Cook, "Agriculture's role in the Soviet economic

crisis," in Michael Ellman and Vladimir Kontorovich, The disintegration of the Soviet economic system (London,

Routledge, 1992) p. 195.

The Scope of State Procurement

While the volume of state procurement has fallen significantly since the late 1980's, the state still purchases a significant share of major agricultural products (see Table 5). State procurement is used in part to fill federal and regional food funds. The melange of recipients of products from the federal food fund illustrates the Soviet method of resource allocation. For example , in 1993 the federal food fund was ordered to deliver 1.8 thousand tons of milk to the Russian meteorological service, 7.2 thousand tons of meat to the tax service, and 65 million eggs to the joint stock company Gasprom, among other recipients. As Table 6 illustrates, government organs of various sorts are very significant customers of the federal and regional food funds.

Table 5

The Significance of State Procurement

product

procurement as % of prod'n,

ave. 1986-90

procurement as % of prod'n,

1993

total volume of procurement 1993, ths. tons

total cost of procurement 1993, bil. Rub.

milk

72.1

52.4

24632

1188

meat

74.5

49.4

5273

1886

eggs

70.9

60.0

22789

476

grain

32.9

27.7

27968

1801

potatoes

22.4

4.4

1670

112

vegetables

66.5

21.7

2122

315

sugar beets

86.7

27.7

7064

176

sunflower

94.7

23.0

645

Source: Calculated from data from Goskomstat and Ministry of Agriculture.

Food markets in Russia have already developed to the point that individuals, including government workers, should be expected to be able to buy food for themselves. If institutions want to purchase food in bulk to provide food for their employees, they should make arrangements privately. Moreover, a natural path for reform is for the various government departments currently arranging food deliveries to re-organize themselves as private food wholesaling companies. Eliminating the state role in food procurement is a key step to stimulate the development of private marketing and distribution arrangements.

Table 6

Allocation of Food from Federal and Regional Food Funds

(ths. tons)

recipient

meat

milk

eggs

grain

sugar

vegetables

Moscow

550

4000

1430

1350

554

390

St. Petersburg

150

1400

800

700

270

190

military

492

2408

1362

1887

205

417

government organs

120

1530

374

2423

764

enterprises

436

358

329

regions

179

1489

17665

1368

209

others

600

1290

3613

398

total allocation

from fed.and

reg. food funds

1570

11863

5709

27638

3888

1235

planned size of

fed. food fund

983

6042

5833

11828

784

1245

residual (reg. food

fund, waste)

587

5821

-124

15810

3104

-10

Source: Postonovlenie Sovet Ministrov -- Provitelstvo Rossiiskoi Federatsii No. 155 (22 Feb. 1993), o formirovanii federalnykh i regeonalnyx prodovolstvennyx fondov v 1993 godu.

The Role of Subsidies and Credits

State subsidies and credits can to a significant extent explain the pattern of tbe state procurement share across products and over time in Table 5. Milk, meat, and eggs are products for which state procurement takes up the largest shares of production. As Section 4 discusses, these are products that have received the bulk of product-oriented production subsidies. Such subsidies naturally orient producers toward state marketing channels. Grain has seen the smallest drop in the share of state procurement. As Table 7 indicates, procurement credits for grain make up the bulk of procurement credits.

Table 7

Directed Credits for Agricultural Procurement

(bil. Rb)

1992

1993

1994 budgeted

grain

641

1956

n/a

vegetables

128

229

n/a

rural retailers

n/a

other

165

n/a

total

809

2470

4600

as % of GDP

4.5

1.5

0.7

Source: Freinkman, "Government Financial Transfers", and Federal Budget Law, Rossiiskaya Vecti, 6 July 1994.

The apparent absence of state credit programs for the purchase of agricultural products other than grain and vegetables raises the question of why special credits are needed for these products. The need for credit does not appear to be associated with the process of regional redistribution of food, since the patterns for grain and vegetables are much different. Almost half of state procurement of vegetables is used to provision Moscow and St. Petersburg, while there are no regional vegetable funds. On the other hand, the total volume of grain in regional grain funds is about a third larger than the volume of grain in the federal fund, and regional grain transfers are large relative to total state deliveries of grain.

While grain procurement credit amounts to 80% of total state procurement credit, the cost of procuring grain is not a convincing rationale for issuing state credit for that purpose. As Table 5 indicates, the total cost of state purchases of other commodities, such as meat and milk, is about the same as the cost of state purchases of grain. Since most grain is harvested during August and September, there is significant seasonality associated with grain production. However, there is also significant seasonality associated with milk; in early summer milk production is about 2.5 times greater than in the winter.[14] Moreover, grain is an alternative to rubles as a store of value and it may provide a less risky form of wealth than rubles in the current environment of macroeconomic uncertainty. With the development and privatization of storage facilities, producers will not rush to sell their grain immediately, and the government does not need to rush to provide credit so that it all can be bought immediately.

Credits issued for state procurement have involved large real resource transfers. In 1992 federal credits for state procurement were of an amount equal to 4.5% of GDP. Federal procurement credits in 1993 fell to an amount equal to 1.5% of GDP, and the 1994 budgeted level is equivalent to 0.7% of GDP. See Table 7. While funds for state procurement have been falling, federal credit for the creation of federal and regional food funds remains the largest item of agricultural expenditure in the 1994 federal budget.

The 1994 budget explicitly notes that the budgetary funds for procurement are issued "on the basis that they are to be returned." Given inflation rates on the order of 10% a month, simply returning this money after six months or a year (a typical term for procurement credits) implies a significant real transfer to the recipients and loss for the budget. Moreover, credits provided for procurement in the past have not been repaid, as the special remark in the budget hints. In 1992, about two-thirds of grain procurement credits were not returned on time, and in 1993 more grain procurement credits were rescheduled. In 1993 41% of all credits issued for the agricultural sector were rescheduled.[15]

Private agricultural marketing and distribution companies, which have to borrow at commercial rates, face large disadvantages in competing with state procurement agencies trading on subsidized credit. A typical argument for the necessity of state procurement is that there are no other firms to take up the job. But private firms will not develop rapidly given the special credit lines for state procurement agencies. Moreover, the state procurement process perpetuates the system of centralized food deliveries to government institutions. The procurement agency's shipments to government organs can be used to offset the state credits it has already received. Thus payment is assured, and there is no incentive on either the buyer or seller's side of the market to make sure that the product is of good quality and not wasted.

Russian history provides some indication of the appropriate role for state credit provision. Before the Bolshevik Revolution, a time when communication and transport costs were much higher than they are today, the State Bank provided only 11% of the cre