Joseph Brian Gross and Dr. Phillip J. Bryson, Marriott School of Management

Background

This research began as in inquiry into the general causes for the failure of modern rural reforms in Russia. This study traces the development of rural trends from the abolition of serfdom in 1861, through the Soviet era of centralized planning and collective farming, up until the post- Soviet era of privatization. This study identifies and categorizes the modern incentives and obstacles that have stymied organizational restructuring of Russia’s rural sector.

Privatization began in 1990 and resulted in private ownership of 60 percent of agricultural land by 1996, although farms continued under state management for several years thereafter.ii Contrary to the appealing intuition that markets and private ownership would increase efficiency, agricultural output fell significantly. By 1998 output was 50 percent of its 1990 level.iii Macroeconomic instability partly contributed to this deleterious effect. Price liberalization increased fuel prices, which in turn increased production costs, driving many farms into bankruptcy.iv

But privatization of collective farms is only half of the picture—whether publicly or privately owned, inefficient management persists. When given the choice to reorganize privatized farms, managers and employers alike have largely chosen to retain inefficient, collective forms of organization. Although privately owned, little has changed in the operation of collective farms.

Persistence of Dichotomy in Rural Organization

What accounts for the persistence of collective organization and the retention of Soviet managers? Influential managers have an incentive to divert assets from their best use for their own personal gain. To prevent employees from asserting their right to exit the collective with a share of assets and land, these opportunistic managers misinform or misrepresent employees’ rights or give employees the most undesirable plots of land upon claiming their shares.

Employees consent to this scheme for several reasons. They re-elect Soviet managers in hope of obtaining government subsidies through the managers’ political clout. While wages are in arrears throughout the whole country, collective members must choose between the possibility of obtaining future rents and wages versus taking a share of land and primitive equipment, unsuited for medium-scale farming, and attempting to start their own agro-processing enterprises. Rather than receiving monetary payments, collective members rely on a combination of in-kind payments and hoarded inputs, which they use for barter and for the cultivation of household subsistence plots. These side benefits provide strong incentives for remaining in the collective.

The existence of subsistence plot cultivation became apparent during perestroika when Gorbachev encouraged its expansion. The past decade witnessed an increase in subsistence production of 13 percent.v This shift from behemoth, large-scale production to subsistence farming is significant for its effect and for the lessons it provides. Russia has essentially reverted to an unspecialized, subsistence economy, in which 80 percent of the citizenry relies heavily on food that it produces itself in small, personal household plots.vi

Prospects for Convergence

Subsistence farming, in addition to other employment, is a necessary way of life for most of the Russian population. However, it is clearly an inadequate answer to the call of market reform. In order for Russia’s agricultural sector to recover, incentives must arise for the creation of economically viable, private farming enterprises which will close the gap between inefficient, collective farming and primitive, subsistence production (Figure 1). Restricting subsidies would reduce rent seeking and resource-dependence.vii Securing foreign investment by broadening ownership and increasing legal protection for businesses would also improve market institutions. Other measures (e.g. increased availability of small business credit that stems from improvement in managerial transparency) all show that market systems must evolve along with the supporting institutions, and cannot be legislated into existence. To be sure, the real achievement of Russia’s privatization of agriculture has been the peaceful transfer of titles to private persons. Although far from complete, the achievements of Russia’s transition should not be discounted, but rather taken as a valuable a lesson in transitional economics and the first stages of market evolution.

 

 

References

1. This report is a brief summary of an Honors Thesis by the same title, which treats this analysis and its conclusions in greater depth. Available at the Harold B. Lee library at Brigham Young University, or by contacting the author directly by email at: jbg22@email.byu.edu.
2. Europa World Yearbook. London: Europa Publishing Limited, 1999. (Pg. 2843).
3. European Marketing Data & Statistics. London: European Research Consultants Ltd., 2000.
4. Eastern Europe in transition: Strategies for rapid social transformation. ICPF. [Online]. Available: http://www.icpd.org/development_ strategies/Transition_Economics -Report_of_ICPF_Working_Group.htm (8/23/2000).
5. Ioffe, Gregory, Nefedova, Tatyana (2000). Areas of crisis in Russian agriculture: A geographic perspective. Post-Soviet Geography and Economics, 41:4. (288-305).
6. Bezemer, Dirk J. (1999). Russian reforms: The return of the peasant? Tinbergen Institute and University of Amsterdam. [Online]. Available: http://www.fee.uva.nl/bieb/edocs/TI/1999/ TI99046.pdf. (2/26/2001).
7. Kochin, Michael S. (August, 1996). Decollectivization of agriculture and the planned economy. American Journal of Political Science, 40:3 (717-39).