Page 16 - BNE_magazine_02_2020

16 I Companies & Markets bne February 2020
Private ownership of land will also open up credit lines as land can be offered as collateral, allowing farms to raise the capital they need to invest into their land.
There is a debate over whether the land market should be opened in two phases, with the state offering circa 2mn ha from a total of 9mn ha of state registered land suitable for agriculture in the first phase before throwing open the gates to private sales, or if the whole market should be opened in a single stoke of the pen.
In the second case the state could offer about 0.3mn ha of land in addition to the estimated 2.3mn ha of privately owned land, according to estimates made by the US Department of Agriculture (USDA) in 2015. Experts estimate that about 8% of landowners could be persuaded to sell their land in the first five years after the moratorium is lifted and another 3% would sell over a longer period.
“One of the big worries about the reform is that it will be skewed in favour of oligarchs”
One of the big worries about the reform is that it will be skewed in favour of oligarchs. Deininger writes that typically smallholders have a difficult time accessing land even if there is a functioning market as Ukraine’s credit markets are so underdeveloped they simply cannot raise enough money to grow their farms by buying more land.
At the same time the opposite is true for oligarchs that have plenty of access to credit and cash, which would mean the agriculture business will be rapidly monopolised by a few large groups.
Allowing foreigners to participate in the process would introduce some competition, but with their equally deep pockets, and the relative attractiveness of Ukraine’s extremely fertile land, the result is the same: the rapid monopolisation of land, except some of the owners would be large international agricultural groups that would export profits.
“Even if land can be used as collateral, a large part of the transaction costs of providing credit is fixed. Thus, even if they have credit-worthy projects, small farmers may have difficulty accessing credit. And hence support to level the playing field for them may have positive impact on productivity,” say Deininger and Nivievskyi.
One of the recommendations the World Bank makes is for the government to set up some sort of guarantee fund, especially for smallholders, to access credit easily, which would level the playing field somewhat and could double the productivity of small farms. The government also needs to end the subsidies it has offered large farms as part of its effort to promote the sector.
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“Over the last two decades, agricultural support in the
form of substantial tax benefits and direct budget outlays
in Ukraine has always been favouring large producers thus creating unequal conditions for developing the small ones. This partially distorted the farm structures towards the large and mega-large agriholdings in Ukraine and left less space for improving productivity and diversification of the small ones,” say Deininger and Nivievskyi.
Outcomes
There are a lot of moving parts, but Deininger and Nivievskyi estimate in the most liberal scenario – foreign participation, no caps on land ownership, financial support for small farms – the reform could create some $10.6bn of additional value in the economy, or add 8% to GDP and $2bn-$3bn per year over three to five years. This extra activity would boost
GDP growth by 1.8%-3.1% each year – a significant acceleration of growth.
“Scenarios with more stringent restrictions in general produce lower GDP growth rates. The lowest growth occurs in the scenarios were legal entities have no access to the farmland sales market. The scenarios whereby only state land is sold on the market produce some growth but it fades pale compared to growth opportunities contained in the one-go land market opening scenarios,” Deininger and Nivievskyi write. “Expected farmland in this case is relatively high, though, i.e. more than $6,000 per ha, which is because of the high demand and very limited supply available.”
The government's choices will make a big difference to the impact of the reforms and the price of land which could range from $1,000/ha to $6,500/ha depending on the conditions.
In order to maximise the effectiveness of the reforms the academics made several recommendations.
The first was to open the market all in one go. The state can only offer about 2mn of its 9mn ha of agricultural land as most of this land is already leased and so cannot be offered for sale. Because of the limited supply prices would soar, which favours the oligarchs and excludes the smallholdings. And finally the two step approach to opening the market would have only
a minimal impact on growth, lifting GDP by 0.74% at most, compared to 3.1% in the scenario where private agricultural land markets are opened as well.
The second recommendation is to set up and strictly enforce anti-monopoly rules covering land ownership. The basic idea is to limit the amount of land any one person or company can own to prevent the oligarchs or big firms from dominating the business.
“Strict enforcement of anti-monopoly regulation that
limits the share of land owned by one entity to 35% of agricultural area of an amalgamated community (OTG)
is necessary to avoid undesirable outcomes,” Deininger and Nivievskyi write.