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3.1. Unavoidable privatization - FARMER COOPERATIVES VERSUS COLLECTIVE FARMS American Studies on Ukrainian Problems Vitaly V. Zinovchuk

This part of the study is devoted to the consideration of the probable structural transformations of Ukrainian agriculture. The suggestion proposed below is a simplified and idealized variant for future development. It is neither a proposal for government nor a program of farmer action. The principle task of these conclusions is to attract the attention of persons and institutions interested in fundamental restructuring of Ukrainian agriculture to the idea of using the experience of real cooperatives of United States and other developed countries. This experience demonstrates how important cooperation is for balancing the interests of agricultural producers, government and society as a whole in a market economy. Taking into consideration historical, economic, and social preconditions of future agrarian reform in Ukraine and also the model of agriculture in countries with market economies, it is possible to represent the general scheme of market transformation in Ukrainian agriculture in following succession:

First, it is necessary to decentralize economic power by spreading it among independent agricultural producers. The government program of privatization has to be carried out to create "critical mass" of such producers which will be directed in their actions by market considerations.

Second, the state monopoly in agrarian sphere and attended industries must be terminated. The state must gradually leave commercial activities in agriculture, cease artificial support of inefficient collective and state farms, and have only restricted intervention as it is usually done in the countries with a market economy.

Third, agricultural producers need a new type of organizations controlled by themselves. In this aspect, the experience of American farmer cooperatives can be especially useful. Of course, it is impossible and unwise to copy any overseas cooperative experience in total, but the fundamental principles, organizational approaches, democratic management, successful marketing strategies, methods of doing business, system of financing, etc., could be successfully applied in Ukraine.

Fourth and last, social functions which are conducted now by collective farms must be transferred to the local municipal authorities. They must take complete responsibility for the general organization of rural life and solution of social problems at the local level.

Current agrarian crisis in Ukraine is a crisis of the organizational structure of agriculture. That structure which was created by collectivization is not compatible with the general transformation of Ukraine to a market economy and democratic society. Its inefficiency is unquestioned. The collectivized agriculture is literally destructive, and because of that the general economic crisis is intensified. The most reasonable way out of the existing situation is to propose an alternative organizational structure for agriculture. Both structures are to exist together a certain time, and then gradually, in the process of competition, the new structure will replace the old one. The characteristic of this vision is a preference of evolutionary changes to rigid revolutionary methods. Such transformation is approved by all interested institutions and majority of population.

However, during recent years there was hot discussion at the different levels as to which category of agricultural producers (or primary structural units) is more preferable for future: reorganized collective farms1 or independent private farmers of the Western type. The reason for the discussion was to attract public and governmental attention for political support of the preferred segment. The defenders of collective farming had strong arguments:

- collective farms are the largest agricultural producer in Ukraine, and it is a nonsense to destroy the largest producer;

collective farms were also affected by command system, and under new political conditions are able to fundamentally change their economic performance [Melnyk, p.86];

- large-scale farming has some important advantages, and destroying them would be a great error; only collective farms can provide large-scale production and considerable business operations at the moment;

- private farms have a primitive level of production; their size, technologies, and technical level do not provide an opportunity to use available resources effectively;

- collective farming became a traditional style of living, and Ukrainian peasants have an aspiration to collectivism [Nelep, p.68];

- collective farms are also a social system based on group settlement with certain social infrastructure, functions, etc. It is impossible to change this situation very soon.

The importance of these arguments on one hand, and the statement that private (family) farms corresponding more to a model of market economy on another, made continuation of the discussion unreasonable. It resulted in a certain compromise based on the point that no category of producers will have any preference and special official privileges. They must be given the equal economic rights, and prove their fitness in competition. Maybe the following opinion can express the most popular point of view:

"The consideration of them [collective and private (family) farms] as the only alternative variants leads to extremes in answer to the question: who will feed people of Ukraine — collective farms, private farming, or small-scale peasant economies ? Any single answer this thought up question is mistaken. Today it is necessary to provide efficient use of agrarian resources of all acting economic systems by placing them into market competition conditions, in dependence on demands of consumers and the state. Who will be stronger will predominate, and will initiate positive changes; and who will be bankrupted that will be transformed to more progressive forms of economy, i.e. will cease existence in antiquated parameters. Those are hard laws of the market1" [Lukinov and Shepotko 1993, p.6].

Thus, the reforming of Ukrainian agriculture must be conducted in two parallel ways -- by restructuring of the system of collective farming and development of private (family) farms. This is the primary condition of alternative organizational structure. However, it seems to be a mistake to find a place for private (family) farms within the system of collective farming, as some Ukrainian scholars do [Melnyk, p.87]. Integration of these two types of farming into a common organizational structure will be possible in the future but they must become more homogeneous. For an explanation of that let's use Table 21. Collective and private farms will become homogeneous participants of economic relations, and will be able to cooperate when they overcome fundamental differences existing between them. For this, collective farms must revive the property incentives, and private farmers must establish their own business organizations. It is clear that privatization of property, including land in collective farms as well as appearance of new business organizations, is the unavoidable step to new organizational structure. Of course, business organization of collective farms also must be changed fundamentally in accordance with conditions of a market economy.

Table 21. Some peculiarities of collective and private
farming in Ukraine

Peculiarities
Collective farms
Private farms
Incentives of property essential
No
Yes
Business organization exists
Yes
No

The privatization, i.e. the process of transformation of public property to a private one, is important for Ukrainian agriculture in two main aspects: a) for increasing individual and group motivation of economic activities and efficient use of agrarian resources, and b) as a possible channel for appearance of new private farms. Generally, the idea of privatization is comprehended and supported by the majority of the rural population. However, there is no clear understanding of the notion "private property" in Ukraine, even at the academic level. It is worth remembering that private property is the exclusive right of a person, natural or corporate, to control and enjoy an economic good, limited by law [Sloan & Zurcher, p.347]. For many Ukrainians, especially rural people, private property is associated with ownership of a physical person or family. Possible corporate character of private property is not taken into consideration. In order to mark privatized property of collective farms there is a popular tendency to use notion "collective property". In fact, it is a private property of the collective which is a group of people who are members of the collective farms.

On one hand, it seems not so essential which term should be used, "collective property" or "private property of collective", but in reality such substitution can lead the process of privatization to formal results. Collective property does not presuppose obligatory sharing of the property, and that is why it ignores the appearance of individual motivation for efficient use. This means that the most critical consequences of collectivization will not be eliminated. When property remains undivided, its owners are actually its only users (no need to note how great the difference in attitude to property for owners and users is), and the power of central management is unlimited and uncontrolled. Meanwhile, the term "private property of collective" emphasizes that it is new relations of property. Three main aspects make these relations fundamentally new:

the right of each owner to know exactly the size of his individual share in common property;

the right of each owner to sell his share to another person and to leave the enterprise;

- the right to each owner to personally share in the benefits of common property stock.

Hence, collective farms must share their property and land among their members, and then to unit the shares of members who decide to stay in business together. New organizations will already be a type of private business enterprise. This means that they will be separated from state control and support in case of poor management or even bankruptcy. But at the same time, they will be given full economic freedom within the frame of available resources, market demand, competitive environment, and existing legislation.

Taking into account the scale of land territory in Ukraine, variety of natural and climatic conditions, and some historical and economic preconditions as well, it is possible to claim that the different regions of the country have varying opportunities, and therefore, different attitudes towards the idea of privatization. For example, Western regions of Ukraine are very conducive to the revival of private property in agriculture. There are still a lot of people who remember how to operate private farms. It should be noted that these regions have historically had close contacts with Central Europe countries (such as Poland, Hungary, Slovakia) where the process of privatizing agriculture is about to be completed. Northern regions of Ukraine have small natural size of fields, more grazing lands and average-scale animal production facilities. Also this zone is important for production of certain crops (potatoes, flax, hops) which are in great demand due to the limited area of their cultivation. South of Ukraine has the highest rate in reestablishing of private farms. They are mainly engaged in production of heat-loving fruits and vegetables. Eastern regions which are bordered with the most important agricultural regions of Russia, and traditionally are more influenced by Russia, can adopt the experience of the neighbors which privatize their collective farms more quickly. Thus, it is possible to find favorable conditions for privatization in all regions of Ukraine.

The keystone of privatization in Ukrainian agriculture is how to privatize land. Until recently the state kept the absolute monopoly in land ownership. It made all attempts to privatize collective farms logically uncompleted - one link of the whole system had always been lost. Even private farmers who received land allotments were not sure about their legal right on this land. Such uncertainty caused doubts about the irrevocability of market reforms.

The vitality of the land reform is also dictated by the impossibility of continuing started privatization in collective farms. During 3^4 recent years many collective farms had been trying to share their property, i.e. to determine each member's individual share in common property (in monetary estimation) according to their labor contribution in the past. The amount of salary, received by the member during his work in the collective farm, adjusted for inflation, was the criteria for sharing. It was not a complicated calculation, and each member knew the value of his own share. Some collective farms even started to distribute a part of profit as dividends (15% or less was "recommended" for them). But generally, privatization of this kind was already finished at this stage. Taking into consideration that the majority of collective farms either did not have any profit or did not distribute profit as dividends, this sharing of property was turned into the usual formal campaign of the former Soviet style. It even could be estimated as a devaluation of the idea of privatization. The failure of this campaign could be explained by following reasons:

1. During collectivization the peasants were forced to socialize their properties and land, but now they were returning only the right to a personal share in common property. Property without land was not a real incentive because the bondage on collective farming was maintained.

2. Even with determination and annual reestimation of his individual share, the member of collective farm in fact was only its formal owner. He could not receive it in cash or in any other form and leave the enterprise. The mechanism of secession from collective dependence was absent.

Overcoming these two imperfections of privatization should be recognized as the most urgent problem. As for privatization of land, a step of outstanding significance was made in November 1994 when the Ukrainian President signed the Land Reform Edict. This governmental document's main aim is to create conditions for the equal development of various forms of ownership and farming, for citizens of Ukraine to have a choice in this matter, to improve incentives of production, and to ensure on this basis that agricultural output will increase. The privatization of land used by agricultural enterprises and organizations was recognized by Ukrainian government as an urgent and paramount measure in implementation of market reforms in Ukraine. The edict emphasized that the transfer of land to private ownership must be conducted on voluntary principles, proceeding from the fact that land should belong to those who cultivate it. Each member of an agricultural enterprise is issued a certificate for the right to private ownership of a plot of land. It is established that the right on a plot or land share can be an object of purchase or sale, a gift, an object of barter, a legacy, or subject to a mortgage. New owners of land may voluntary set up agricultural enterprises, associations, joint-stock companies, or cooperative associations [FBIS Daily Report, p. 35].

Before the appearance of the edict two main approaches for land privatization were proposed. According to the first of these approaches, each adult citizen of Ukraine should have an equal-right to receive, free of charge, an equivalent plot of land (of average quality). But this approach was not met with understanding and support on the part of the peasantry. Another approach suggested giving priority to privatize land to those who cultivate it and are personally engaged in agricultural production. To satisfy the land needs of those who are not members of collective farms, and in order to permit them to organize private farms a special reserve (land) funds was required in every collective farm. The size of the fund is to be seven to ten percent of the collective farm's agricultural land, and up to a half of it should be arable land. This approach suggested that in the next few years only 10-15% of agricultural land would remain in the state ownership, 20% would belong to private (family) farmers, and the rest (about two-thirds) would be transferred to private ownership of collective farms [Onyshchenko, p.1-3]. Finally, this approach was taken into consideration by government. Thus, the solution of the land privatization problem recently has been significantly advanced.

The problem of how to create the mechanism of secession from collective farms still exists. It is evident that under conditions of poor results and general economic instability, it will be impossible for collective farm members to getting a cash share in the near future. Heterogeneity of collective property also could not allow everybody to get an equivalent part of property in machinery, equipment, tools, etc. Even if possible, there would be no reason to do that. This problem is especially difficult when large-scale facilities or expensive machinery and equipment are taken into consideration. Obviously, it can't be solved by one action and in a very short period. The most acceptable approach is to narrow gradually the number of owners of a certain part of common property during some stages. This means that it is necessary to transform undivided collective property to private property of collective farms (it was mentioned before), then private property of collective farm to private property of its production divisions or any other groups of workers, then to private property of individuals. For example, for production collectives it could have the following stages:

Zero stage "The search". At this stage the object of privatization is being determined on the basis of exposure of mutual interests for both the collective farm and the potential future owners. The large animal production and processing facilities, repair workshops, expensive machinery and equipment required collective labor are the most acceptable objects for such privatization. For the collective farms this interest may be concluded by the fact that it is unable to achieve normal profit because of high production, labor or energy costs, or when existing technology and labor organization does not provide effective use of the object. A reason for persons who desire to privatize this object can be found in advantageous investments, in the opportunity of production initiative and economic independence. The future owners must be collective farm members who are directed by the idea of entrepreneurship and are not satisfied with their compensation for work in public sector of production. They may unite their individual shares and buy up the object from collective ownership. People which worked with this object before, and especially under contracts or lease, must have the primary right for privatization. This stage will take a period from some months to one year.

First stage "Stabilization". At the next stage it is necessary to solve the problems of financial maintenance and launching of production for created enterprise. The first problem can appear even before privatization when the united shares of future owners will not be enough to buy up the object. In order to control their business the member-owners' joint share must be not less than less 51% of the object value. Other financial resources would be received from members of the same collective farm, who do not want or are not able to start their own business. For example, pensioners, employees of nonproductive sphere, or persons who receive a share in heritage. Collective farm itself can also invest in new enterprise taking a share of its property. The new enterprise and collective farm can agree that gradually the share of collective farm will be bought up by principle enterprise's owners. Obviously, during a certain period a new enterprise cannot exist without assistance from the collective farm. Marketing, supplies, access to production and social infrastructure will be provided by the collective farm. To make this cooperation mutually beneficial both sides must negotiate their obligations and conclude a written agreement. The collective must have its representative(s) at the board of collective farm. The relations within collective must be legalized in legal documents such as bylaws and temporary agreements. The duration of this stage is not more than one business year.

Second stage "Strengthening and expansion". At this stage the collective at their expense carries out the reconstruction of buildings, improves technology, and increases volume of production. An important rule may be to avoid any clubbing together to buy a new property. All newly acquired parts of property must have as a little number of individual owners as possible to facilitate control and to provide incentives for maintenance and optimum use. To stimulate investments a part of net income is to be distributed as dividends on capital. The relationship of property must also be secured by written agreement between owners in order to prevent the any owner's neglect of joint interests. The collective can hire a professional manager and other employees at expense of the collective. At this stage it will be reasonable for the collective to minimize the economic relations with collective farm (if it still exists). A very important point is to find a reliable marketing channel and stable suppliers. The best variant for that will be to join cooperatives with other independent producers. This stage may continue some years.

Third stage "Economic independence". Private ownership will change labor and investments motivation. The process of capitalization will continue. It will be possible to expect increase of labor productivity. This means that collective will have alternatives as to whether to limit the number of working places or to grow internally. The need to use professional consultants and research can also appear. At this stage property should be fully personalized. All new acquirements must be conducted only on individual basis or in special cases by extremely limited partnership. When there will be a shortage of personal financial assets, an owner will take credits, even borrow money from other members on a mortgage basis. After personalization of property the problem how to leave business will be completely solved, and privatization will be finally completed.

Thus, personalization of property and privatization is not as unsolvable a problem as some supporters of collective farming maintain. An important aspect of this process is to keep strong principles of social justice, especially concerning older people who contributed a lot in the creation of the property in the past but now are not able to use it physically. They, first of all, must be taken into account and have the equal rights and benefits of the owners. Hopefully, their ownership, particularly on land, will become an important source of money for living. The property of collective farms also must be unavailable for so-called "business structures" (numerous recently appeared business people, individuals and organizations, who are often looking for easy money at the expense of less enterprising rural people). Leaving commercial activities in agriculture, the state must turn its attention to creation of a reliable mechanism to protect the economic interests of agricultural producers.