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3.2. Selfrunning organizations and competitive environment - FARMER COOPERATIVES VERSUS COLLECTIVE FARMS American Studies on Ukrainian Problems Vitaly V. Zinovchuk

The privatization of collective farms is not an end in itself for restructuring agriculture. It is only an obligatory stage in the formation of new type enterprises in the sphere of production. These new enterprises will be the primary units of the alternative organizational structure of agriculture. At this stage of the study it is time to answer three important questions:

What will be the primary units of the organizational structure ? What motives will force them to be more productive and efficient ? How they will establish an entire system?

All new production enterprises will have some common features. First, all of them will be private organizations emancipated from the state control and the dependance on state distributions of resources. They will be fully responsible for the results of the economic activities. This means that the state will not compensate the losses of unprofitable enterprises. It will enhance the role of competition in agriculture. Second, all new enterprises will be granted the freedom of economic choice (of course, in the limits of existing legislation that facilitates trade and commerce), and they will be motivated by market considerations in making choices. The most important marketing decisions such as product policy, pricing, marketing channels, product promotion, etc., as well as choice of suppliers and creditors must become an internal affair of the enterprise. New enterprises may establish new associations for satisfaction common needs. Third, as new enterprises will be private organizations they will fundamentally change the financial performance of their business. To keep economic independence they must primarily account for their own financial assets. Maybe in some cases it will be reasonable even to limit the number owners from among people who are working at the enterprise and pensioners. In order to provide additional incentives for personal investments in common business they will have to pay dividends linked to performance. Fourth, new enterprises will need a new system of management built on the control from "a bottom to above", democratization of the management (elections, accountability, subordination of interests, etc.), and a combination of members' control with professional management.

It is possible to expect that the alternate structure of Ukrainian agriculture can be introduced by three main types of private production enterprises:

- worker1 cooperatives;

- joint stock companies of agricultural producers; private (family) farms.

It should be noted that all these types of enterprises have already appeared in Ukraine agriculture. The first two types are established on the basis of reforming collective farms. Taking into account that privatization in these collective farms is not yet completed, simply changing names of collective farms has not changed their economic essence. But anyway it is a positive movement as it demonstrates a urge of collective farm members and their leaders to transfer their enterprises to a market oriented business organization.

Collective farms have some important advantages of economies of size. It is very important to preserve large scale of production (size of fields, system of crop rotation, animal production buildings, processing facilities, etc.) as well as volume of business operations. That is why the restructuring of collective farms must be done so that their successors can inherit the mentioned advantages.

Worker cooperatives is one the most acceptable type of privatized enterprise in Ukrainian agriculture for the near future. These primary production organizations can be created by unification of individual property shares of workers in production and service divisions of collective farms. Taking into consideration that during the perestroika period the majority of collective farms had already formed a system of primary production collectives, and the fact that many of these collectives had been working under contracts, the probability of the wide spread of workers cooperatives is very high. Some Ukrainian scholars suggested that the optimal size of such cooperatives would be 6-18 people, and each collective farm would be divided into 15-20 cooperatives of different profiles1 [Malyk, p.55]. In spite of the fact that worker cooperatives will be organized on the base of collective farms they will have fundamental differences:

- property of worker cooperatives will be personalized or very close to that;
- members of these cooperatives will have a right to leave the enterprise and to sell their shares to someone else;

- worker cooperatives will obtain freedom to enter any economic relations, passing centralized management of the collective farm (for example, to become a member of farmer cooperative) and even to cease-any relations-with the collective farm and its other divisions;

- worker cooperatives will pay and be paid for any products and services at market or specially negotiated prices with other business partners;

- worker cooperatives will be fully responsible for results of their economic activity, their failures, as before, will not be compensated at the expense of redistributions of other divisions' resources.

Members of the cooperative should delegate governing of their organization to the elected board of directors. One of the primary tasks of the board is to hire a manager. He must be a specially educated and experienced person with leadership qualities. The manager should not be a member of the cooperative. In this case members will control and hold him responsible for performance of the cooperative. To have the manager and other employees interested in the final results of the cooperative's economic activities the board can adopt for them a flexible system of bonuses.

Net earnings of the worker cooperative may be distributed partly as dividends on capital stock (to stimulate investments) and as cash bonuses proportional to received salaries (to stimulate individual labor contribution). A part of net income should be reserved as unallocated reserve for covering losses or other unexpected expenses. Use of the unallocated reserve for investments must be very carefully thought over to avoid increase of depersonalized property.

Worker cooperatives as an economic organization, even in developed countries, have some specific problems connected with harmonization of economic interests of members-owners, incentives for investments, contradiction between providing profitability and preserving working places, etc. The danger of failures in working cooperatives is usually great [Roy, 234]. However, in the current situation restructuring Ukrainian collective farms will prefer the most acceptable (i.e., realistic) variant of reorganization which may not be obligatory the most perfect one. If economic results of a worker cooperative are poor, further restructuring will occur. Thus, this approach any way will lead to more perfect organization.

Many Ukrainian collective farms have already declared themselves as joint stock companies. As in the case of worker cooperatives, it is more a desired status than real. However, the development of privatization will give an opportunity for the appearance of real joint stock companies as well. The main problem of transformation to a real joint company is how to obtaine of individual shares in free disposal. A general answer could be to use stock market for this purpose. But the obstacles are that a) stock market in agriculture does not exist in Ukraine, and b) collective farms prefer to be transformed into closed joint stock companies. The status of closed joint stock company gives the right to be an owner of the company only to those who are their workers. This preventive measure is quite understandable from member-owners' point of view. Hypothetically, the member owner can receive his own share only when somebody will want to work for this company and to buy his share. Because of the low level of individual incomes of rural population and relatively insignificant migration, this way is not realistic. The most visible solution to this problem is to provide maximum personification of property, and gradual decrease of general number of the owners.

From an organizational point of view, worker cooperatives and closed joint stock companies of agricultural producers are very similar formations. The membership and ownership in both organization are organically connected. They have the same system of management, the same structure of capital, the same opportunities and problems of entering to the market relations. Some distinguishing features may occur in the system of control (joint stock companies use proportional membership voting), and distribution of net earnings (joint stock companies more oriented to dividends on stock). This similarity of workers cooperatives and joint stock companies make them homogeneous subjects in the relationships with centralized management of the collective farms. These new kinds of relationships can be built on the real cooperative basis.

The third type of production enterprises in Ukrainian agriculture, is private (family) farms, established by full separation of individually owned farms from public production. In spite of the fact that this type of farming was only recently officially recognized there are a rapidly increasing number of private farmers in Ukraine (Figure 31).

Number of private farms in Ukraine, 1989-1993.

Figure 31. Number of private farms in Ukraine, 1989-1993.

Data from: Silske Hospodarstvo Ukrayiny: Statystychny Zbimyk. 1994.
Kiev: Ministry of Statistics of Ukraine, p.56.

There are some channels of private (family) farms appearance. One is to get a land allotment for desired people from the land reserve of the collective farms. According to the Land Code the size of private farm is limited to 50 hectares (124 acres) of arable land Ctiapter Three. A Model of Alternative Organizational Structure for Ukrainian Agriculture

and to 100 hectares of all agricultural lands. Local state authorities are responsible for deciding about the exact size of allotment for each farmer. In fact, the average size of private (family) farms in Ukraine is about 20 hectares or 49 acres [Mesel-Veselyak, p. 15]. Of course, this size cannot be recognized as efficient. This problem is particularly significant in Western Ukraine where the density of rural population is significantly higher and the number of people wanting to start an individual farm is larger. Private farmers may also appear due to the expansion of individual subsidiary economies (Figure 32). An important characteristic of this process is the changing of the principal orientation of the farm. Generally, individual subsidiary economies are oriented first of all to the internal consumption of agricultural products within the family and only partly to market. The distinguishing feature of a farm is market orientation of its production. The limitations of individual subsidiary economy such as acreage and number of animals, is practically cancelled in Ukraine. Private farmers also can increase real size of their farms by leasing of collective lands. In the future, probably, there will be one more channel for private farm appearance when bankrupted collective farms will be dismantled.

Transformation of an individual subsidiary economy to a private (family) farm

Figure 32. Transformation of an individual subsidiary economy to a private (family) farm

It is possible to formulate three probable stages in the formation of organizational structure based on private (family) farms. First stage includes the appearance of the first private (family) farms, spreading their experience and increasing their number. For this stage, which is already underway, there are some difficulties recognizing broad spreading of private farming, overcoming of psychological barriers of accepting of the idea of this type of agriculture organization, and belief in its potential possibilities. Even after adopting of the Law on Private Farming (1992) the first private farmers still faced inert executive authorities of the state power. Maybe it is right to blame private farmers for low productivity of labor, use of primitive technology, insignificant share in total agricultural out, and inexperience in agribusiness. But these imperfections are not connected with the nature of private farming and do not reflect its productive potential. They are the direct consequences of crisis situation in the national economy, difficulties of the transition period, existence of distribution processes and cornmand methods of government, and hackneyed economic psychology. The listed factors also affect collective farms in the same degree. It is also a period of-creation of-first'farmer organizations. Farmer associations are already created in all regions of Ukraine, however they are mainly political organizations. As a rule they were created by a government initiative. The duration of the first stage will be determined by of economic crisis which is one of the most significant negative factors for private farming development.

At the second stage the number of private farmers will be increasing tremendously. Obviously, important incentives will come into operation which were ignored by agricultural policies in the past. First all, it will concern the incentives of property, freedom of entiepreneurship and raising competition. Private farmers will be faced with a new set of problems: how to find reliable suppliers and stable marketing channel, how to raise the productivity of the farm and competitiveness of products. It is possible to expect creation of the "critic mass" for the beginning of numerous farmer cooperatives. It is very important that cooperative process develop from "bottom to above", on the democratic basis. It will provide the stability of the organizational structure in the future. At this stage the cooperative experience of the developed countries will be of great importance.

The third stage probably will be associated with the strengthening of-farmer cooperatives. They will be able to become a serious competitor for reorganized collective farms. There will a new level of economic problems for farmer cooperatives: how to provide significant market power and control of the domestic market; how to enter international markets; how to attract additional investments and to provide their effective using. To solve this problems farmer cooperatives will need significant number of specialists in the field of business, organized system of research and personnel training. It is possible to expect at this stage an increase of general entrepreneurial culture. The duration of all stages will depend in part on ability of government to solve macroeconomic problems, political support of the market economy development, competitive abilities of reorganized collective farms.

Thus, privatization of Ukrainian agriculture can lead to the appearance of numerous independent producers. If collective farms use the approach to privatization which transfer their production divisions as primary production enterprises, it can lead to creation in the forthcoming 5-10 years of 200,000-250,000 private agricultural enterprises. It is necessary to take into consideration that, according to the opinion of Ukrainian scholars, there will be also 50,000 private (family) farms [Mesel-Veselyak, p.16]. Of course, these figures are close to maximum, but they reflect the potential of restructuring. Due to new enterprises agricultural producers receive different opportunities for cooperation and access to market (Figure 33).

Increasing number of private enterprises may have two important consequences. First, for the first time Ukrainian agricultural producers will be faced with competitive markets. It will force them to reconsider both production performance and methods of doing business. Some important benefits from that will be received by consumers. Competition, as well as increasing individual motivations of labor, can notably elevate productivity of agriculture without additional investments. For example, according to some American estimations Ukraine is able turn from feed-grain importer (-1.4 million tons in 1992-93) into a net exporter (2.0 million tons in 2002-03) [FARPl U.S. Agricultural Outlook, p.29]. That is why, the strengthening of competition in Ukrainian agricultural market can be estimated positively. Second, large number of producers and competitive markets will cause the active cooperative processes at the different levels. Thus the alternative structure of Ukrainian agriculture will continue its formation.