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Recent State Initiative on Land Consolidation
Felicia Izman, 15 September 2004
Since its coming to power in February 2001 the new Moldovan communist leadership has often expressed its nostalgia for the old times of collective-type agriculture and criticized the National Land Program (NLP) that dismantled this system by creating a private-based agriculture sector with hundreds of thousands of new individual land owners and thus a highly fragmented one. The first policy proposals on administrative-type land consolidation and creation of production cooperatives had been unveiled in mid-2003, but concerted pressure from major donor organizations had forced the GOM1 to retract these initiatives.
The second attempt, in a more explicit form, came out in January 2004 in form of two legal documents "The State Program on Agricultural Land Organization and Arrangement" and "The Law on Agricultural Land Organization and Arrangement". A revised (more focused and detailed) draft version of these documents was then released in mid-April 2004 and circulated among various ministries. As of today, no final document on this highly controversial issue of land consolidation has been approved yet.
The released documents, particularly the State Program (SP), call for embarking upon a major sector restructuring through encouraging the creation of "consolidated enterprises" (basically production cooperatives). The implementation mechanisms described consist of a series of wide-ranging actions including redrafting of major laws, creation of new commissions and adoption of tax, pricing, crediting, marketing and land policies. The documents also call for elaboration of a new Land Code that "would serve better the needs of the sector in the present post-privatization phase" (quotation from SP). Such a code is currently under elaboration within the Ministry of Agriculture and no draft has been released yet.
According to the draft SP, the GOM's reasons for undertaking land consolidation are based on a number of key assumptions that: (i) land fragmentation that occurred as a result of NLP is currently excessively high in Moldova; (ii) individual agriculture is inefficient and uncompetitive; (iii) only optimal-size consolidated agricultural enterprises will be able to produce a high-quality and competitive output; and (iv) creation of consolidated enterprises will create new jobs, increase labor productivity and stop the population outflow from the rural areas.
A rough analysis of these key assumptions easily reveals their un-sustainability and false nature. First, regarding the claimed high fragmentation of agricultural land, we shall take a look at the statistical figures that disclose the following picture of agricultural land tenure in 2003: 54% of the total land fund distributed during the privatization period is currently utilized by relatively large-scale corporate farms (mainly LTDs, but also production coops and joint stock companies) that have in use between 100 to 1000 ha. It is therefore clear that the quickly emerging land lease markets have already resolved to a great extent the fragmentation problem and will continue so as the land market develops further. The second statement with regard to the inefficiency of the individual agriculture is totally wrong provided that today the individual sector2 produces as much as 75% of the total agricultural output by the use of only 56% of total agricultural land, thus exhibiting a significantly greater productivity than the large corporate sector.
The third assumption stating that only consolidated enterprises would be capable of producing a competitive and high-quality output can be easily refuted by the evidence of the mid 90s when the existing kolhozes and sovhozes were loss-making bankrupt entities that kept accumulating more and more debt every year. It thus seems that the GOM proposes to solve the issue of rural poverty by returning to a failed economic system, which was unsustainable in the past and will certainly be so in the future.
And last but not least, while the creation of consolidated enterprises may initially create some new jobs (which shall not be a goal by itself in a country with half of the population involved in farming!), it is not at all clear how this would contribute to labor productivity growth, as according to the laws of economics it would rather do the opposite: the inflow of new labor would only worsen the already low labor productivity indicators of the Moldovan agriculture sector. Moreover, it would certainly not stop the population outflow from the rural areas for the simple reason that these enterprises won't be able to pay a wage anywhere close to the competitive wage range. What would really improve the standard of living of the rural population is the opportunity for people to find jobs outside the agricultural sector, which would ensure labor outflow from the sector, thus contributing to both land and labor productivity growth in agriculture. So, focusing on the real problems of the agricultural sector, such as the underdeveloped markets and services, as well as finding ways to develop and expand the non-agricultural part of the Moldovan economy should actually be the major GOM's concern nowadays (see also Box 1).
It is therefore obvious that under false premises the GOM tries to drag the individual agricultural producers into some-type of collective enterprises that clearly proved their un-sustainability under market conditions in the mid 1990. The draft documents foresee very facilitating procedures for creation of such a consolidated enterprise by requiring the consent of landholders that own not more than 2/3 of a land tract (which by the way means the rest will have to comply against their will). By contrast, the exit procedures seem much more complicated if not impossible, since "the consolidated enterprise breakdown is prohibited if this resulted in size reduction under the minimal optimal level3". This is a clear violation of the constitutional property rights of land owners. A stipulation that clearly unveils the control-driven nature of this political initiative is that "the consolidated enterprises are to be run by specialists appointed by a rayon-level commission".
Box 1. From the Economist Intelligence Unit (EIU) "A backward step for agriculture":
"Assuming that the CPM administration proceeds as planned, the results are almost certain to be negative. The CPM's program reflects its ideological antipathy towards private agriculture, and the solutions it offers stem from a misdiagnosis of the agricultural sector's problems."
A recent study4, which attempted to spot farmers' attitude toward this land consolidation idea found that 76% of landowners/lessors and 82% of lessees would not agree to transfer their land to a consolidated enterprise. Typical reasons given for not wanting to do this were "won't be able to pass my land over to my heirs", "the collective farm will not be more efficient and the employees will be irresponsible", "can sell my land anytime now", or "am satisfied with my land lease contract".
It is thus a pity that the GOM, blinded by its short-sighted political motives, does not want to see the long-term negative consequences of such disturbing policies, including the worsening of the investment and business environment due to insecure property rights, an even further drop in the currently depressed private investments, reduction of external financial inflows, etc. Luckily, it is not at all clear how the Government will get hold of the necessary resources to finance this costly program estimated at 70-90 million lei ($6-8 million). According to EIU, "this represents the best hope by far for preventing its implementation, given that the government is effectively broke." External donors will most probably not show eager to provide
1 GOM - the Government of Moldova
2 The individual sector is comprised of peasant farms and household plots
3 A precise definition is provided in the draft law for the minimal optimal size of a consolidated enterprise, which is: for crops - 100 hectares for cereals and technical crops, 10 ha for orchards, vineyards and vegetable plantations, 1 ha for berries, strawberries and greenhouses; for livestock - 15 dairy cows, 50 cattle, 100 hogs and 2000 poultry
4 "Lease of agricultural lands - 2003", CISR/PFAP, Chisinau, December - 2003