Фонд ім. Фрідріха Еберта Представництво в Україні

Fabienne Pradella

Putting Agricultural Competitiveness and Rural Well-Being On an Equal Footing Long Term Strategies for Rural

In order to leave the remaining legacies of the Soviet system behind, the rural area in Ukraine needs to be re-defined as an attractive place of living and not only in terms of agricultural production.

Agricultural development is often addressed separately from other policy sectors. The impact of the economic and food crises has however shown that new integrated policy strategies must tackle poverty in general and aim at sustainable livelihoods for the (rural) population.

The Ukrainian agricultural sector is also in the need of reform and especially lacks medium sized farms. With stable framework conditions leading to predictable effects on individual farmers, incentive structures for new agricultural undertakings are created.

January 2010

Putting Agricultural Competitiveness and Rural Well-Being On an Equal Footing 1 Long Term Strategies for Rural Ukraine______Introduction Cultivating New Farms: Building Upon Soviet Inheritance In times of economic difficulties, policies often focus on urban centres with the aim Equipped with its rich black soils, Ukraine to support industrial development. As a was one of the bread baskets of the Soviet result, more and more especially young Union. However, despite its own large people move to the cities and contribute to natural resources, the USSR needed to rural depopulation and aging. This also import grains because Stalin's enforced applies to Ukraine and stands partly in collectivization resulted in many years of contrast to the Ukrainian officials' deep unproductive collective farming and famine. conviction of the great potentials of the Irresponsible agricultural production agricultural sector. The increasing number methods limited the country's production of individual decisions to migrate from the possibilities: Excessive strain and incorrect countryside has however not led to the tillage of the former (collective implementation of a comprehensive rural farms) led to soil erosion and steppe- development strategy. Taking into forming. Additionally, agricultural and rural consideration the close interrelation development were closely interwoven. The between rural and urban development, rural life was structured around the kolkhoz such a policy is however indispensable for which assumed all socioeconomic functions. Ukraine as a whole and crucial for the It can therefore be stated that the effective assessment of transition decisions. Ukrainian agriculture today has to struggle The Ukrainian rural population finds with the legacies of half a century of itself in the midst of an ongoing mismanagement. Still in 1998, the part of transformation process. Due to the unprofitable companies among the policymakers' focus on agricultural Ukrainian agricultural producers amounted development, policies to ensure social well- to 92% (Lerman et al, 2007, p.19). being on the countryside are largely absent. During the 1990s, the situation of Especially during the first decade after the Ukraine did not improve despite her breakup of the , rural poverty independence from the Soviet Union. The was on the increase and drove more and downfall of the kolkhoz, rural flight and a more people into subsistence agriculture. massive lack of capital contributed to Moreover, the agricultural structure and reduced grain production. Continued quality standards do not conform to those government intervention in the form of in the European Union (EU) so that further quotas on agricultural exports, grain European integration requires substantial procurement, relutance to liberalize trade1 reforms. and further state support for large farms This paper seeks to explore the aggravated the situation (pp.15-16). Many opportunities for rural development in rural residents were driven into subsistence Ukraine and particularly assesses the role farming during this period, perceived as that agriculture can play therein. In a first temporary solution to the worsening trends part, the state of Ukrainian agriculture and in food availability and affordability. For the rural development is set in perspective of population left on the countryside, the the historical legacies from Soviet times. agricultural companies still performed Second, policy options as part of a long important socioeconomic functions. As „the term strategy for Ukrainian rural farm enterprise took over the functions development are suggested. Special normally fulfilled by local government“ emphasis is in this connection put on the during Soviet times (p. 78) this could not integration into the European agricultural change overnight. Since 2000, however, space. In conclusion, a summary of the findings leads over to a future outlook. 1 Features of a closed economy could be observed on different levels. Whereas the central government maintained minimum export prices, local authorities prohibited sales to other Ukrainian regions in order to meet the region's quota. Putting Agricultural Competitiveness and Rural Well-Being On an Equal Footing 2 Long Term Strategies for Rural Ukraine______this role of the local farm has been considerably larger than those of the transforming2; Even though the corporate private sector. A household plot in Ukraine farms still assist private farming is almost 12 times smaller than the undertakings, these services are now average in the EU-15 (p.3). Consequently, financed by those who are benefitting a lack of productive mid-sized farms can be (pp.3-5). noticed. Privatization of agricultural land was a lengthy process in Ukraine. After paper Designing Appropriate Policies land shares had been handed to the rural population in the early 1990s, nothing The development of the rural area including changed substantively until December 1999 the agricultural sector is determined by when a presidential decree commanded initial conditions, natural resources and their convertion into fully titled land plots policies. Ukraine is endowed with a very for the shareowners. In this way, seven diversely structured agricultural sector with million Ukrainians were allocated physical differing soils and diversified production land3. The landowners needed to agree for possibilities. With a mixed-forest zone in a corporate farm to be able to use the land the West (production of potatoes, flax, any longer. Nevertheless, a moratium vegetables), the rich black soil to the South interdicts the selling of land (p.1). The East (spring wheat, barley) and a veld resulting replacement of the farms based further to the South East (black coal on collective land ownership by family sources), areas for agricultural use are farms, private enterprises, farming available nearly all over the country. corporations and agricultural cooperatives However, agricultural policies also need to altered the agricultural statistics overnight. acknowledge for this high heterogenity of Caution is needed when considering the rural areas. statistics of this time as many old collective It is often stated that the agricultural farms only changed their corporate form. output of Ukraine can be tripled once the Up to today today, many agroholdings and country attracts enough investments. large farming enterprises are operating in However, the question arises in how far Ukraine. productivity growth contributes to The reform in 1999 has however led sustainable rural development: How can to important results. Whereas 95% of agricultural progress be combined with agricultural land had been under control of assured rural livelihoods? Policies need to collective farms before 1990, this part has entail measures that enable all producers to shrunk below 60%. At the same time, benefit, f.i. from price increases through a individual farms (new private farms and proper market infrastructure. Any long term household plots) not only increased their strategy should thus seek to render the share in total but also their particular size. transition to a market economy socially as Combined with the number of unprofitable just and reasonable as possible. farms declining significantly, the individual farms contributed largely to the Strengthening Non-Agricultural agricultural recovery: a growth of 30% Markets between 1999 and 2004 (p.2). First and foremost, rural residents must be Nevertheless, the Soviet dual farm given the opportunity to decide on their structure is still present. This manifests own whether to seek employment in the itself in the corporate farms being agricultural sector or not. The availability of off-farm employment prevents them from facing only the choice between going into 2 This transformation set in considerably slow due to subsistence agriculture or to migrate from the reluctance of the central Ukrainian the countryside. Also the modernization of government to allocate the needed budgets to the local councils which were supposed to take over agriculture needs to be accompagnied by the social services functions. the development of industrial, commercial 3 Rural individuals today own 70% of agricultural and service sectors (processing, land. Putting Agricultural Competitiveness and Rural Well-Being On an Equal Footing 3 Long Term Strategies for Rural Ukraine______agroindustry, commercial and need to focus especially on the attraction of transportation infrastructure). More non young persons to the rural areas. In order farm employment in the rural area can then to create an incentive structure, not only provide employment possibilities for the attractive employment opportunities and newly unemployed due to technical schools but also leisure facilities like sports progress towards more capital intensive clubs should be available. farming. The trend of declining rural populations but constant shares of Agriculture as Part of a Rural employed in agriculture (Lerman, 2007, p. Development Strategy 8) does not seem to be sustainable. In this Although off-farm employment constitutes sense, off-farm employment contributes to one major part of a strategy for the rural the raising of rural incomes. Agricultural future, the importance of a new view on producers in Ukraine (both corporate and agriculture may not be neglected. private farms) mainly focus on primary Rendering farming attractive however agriculture within the boundaries of the remains a difficult task and can only be farm gate so that high potentials emerge in achieved if just conditions apply. It can in the development of nonagricultural this regard be recommended to mainstream activities. In the private sector, processing the social insurance system. Many is moreover not yet widespread. The household plot farmers whose monthly willingness to engage in new activities can income is above the minimum wage face be initiated by courses of instruction for the difficulty of not being able to pay to private farmers in order to enable them to social insurance because a large part of the engage in more capital-intensive production income taken into account is not available methods. in cash but in home-grown and consumed The strengthening of nonagricultural products. This course of action further markets on the Ukrainian countryside impoverishes the rural residents due to however presupposes skilled entrepreneurs their lack of old age security (Lerman et al., and workers whose education needs to be 2007, p.26). As long as rural poverty is not secured. The possibility to make a living in fought resolutely, nostalgia may remain rural environments also helps to slow down popular among the population. Although the urbanization process in Ukraine and the one can objectively note that the Soviet accompagnying problems arising in way of farming was not efficient, for most overpopulated cities4. Moreover, the rural people the end of collective farming improvement of education can be seen as did not bring substantial improvements. strategy to combat the lack of efficiency in This sensitivity towards the past needs to the Ukrainian agricultural sector. This lack be both understood and overcome. is combined with labor supply difficulties Although from an economic viewpoint, an resulting from the absence of skilled agriculture in small scales may not be workers, the decreasing number of young necessary, consultation and support for workers5, decreasing motivation and „bad small-scale farmers can increase the life habits“ like alcoholism and unreliability quality of the rural population which, in the (Lerman et al., 2007, p.8). Future policies end, should not only depend on the mechanisms of the free market. The continuation of the reform of the 4 The rural population in 2005 accounted for land market is another important policy 80% in relation to figures from measure. If private farmers can attain more 1980.(Lerman, 2007, p. 8) 5 A survey conducted by Lerman et al (2007) land, their commercialization will increase revealed that 50% of the respondents (rural with the plot size (p.6) and more mid-sized Ukrainians) prefer their children to leave the farms will help Ukraine adjust to the villages. This figure is confirmed by the international agricultural standards. The evidence that only 24% of the farmers and securing of transferability of land will 8% of the total rural population regard reduce the fragmentation of the Ukrainian agriculture as future career for their land structure. descendants. Putting Agricultural Competitiveness and Rural Well-Being On an Equal Footing 4 Long Term Strategies for Rural Ukraine______The overall aim needs to be the term support programs for particular farms development of a sustainable agriculture. or the improvement of the market This also includes the cautious treatment of infrastructure (producer communities, natural resources and thus total roads, water ways, regular and transparent abandonment of harms like incorrect ways reports on prices and markets). of irrigation and drainage which lead to Additionally, research, consultation and pollutant mobilization. The possibilities for education can support the consolidation of the moderation of climate change should be the reforms. In order to make producers taken into account in all policy decisions. sensitive to cautious working, grants for Moreover, quality is one of the main criteria insurances against production risks can for competitiveness on the European help in the same way as rewards for market and its attainment can be facilitated environmentally friendly production. In with the introduction of slower and greener order to raise quality standards, the farming methods. The state can support introduction of process oriented veterinary this development with targeted and phyto sanitary standards is necessary subventions. Ukraine thus faces the (Lissitsa & Strubenhoff, 2005, pp.10-11). decision whether it wants to produce at low The rural inhabitant needs to be the costs and quality or embark on a strategy focus of any policy. Due to the important of product diversification. role that farming still assumes for the Ukrainian rural population, sustainable rural Reforming the Role of the State development means both the securing of Above all, a paradigm change away from agreeable conditions for agricultural the belief in large corporate farms and the producers and the buildup of an associated economies of scale towards trust infrastructure encouraging a new in the peasant farms which in fact are not generation to stay on the countryside and less productive than their large take part in the transformation of rural life counterparts is necessary (Lerman et al., in Ukraine. In order to meet the 2007, p. 9). Mid-sized farms dominate in expectations of the younger generation, most market economies and agricultural their inclusion in decision making processes policies need to live up to the needs of needs to be guaranteed. these new farms by way of a total retreat from interference at the farm level. Integration in the European Instead, the focus needs to lie on the Agricultural Space completion of framework requirements. In The EU has defined the „European Model of this regard, a clear strategy is needed so Agriculture“ in terms of a combination of that its effects on individual farms are clear international competitivenes with high and predictable. This also means that in product standards and rural well-being. order to combat inequality, no longer most Agricultural activity is supposed to not only government support policies may focus on „produce food but also to guarantee the large farms but they must aim at survival of the rural area as a place to live establishing equal chances for all and work“ (Petrick & Weingarten, 2004, p. corporations (Galushko & Cramon-Tudell, 2). This EU policy is however not directly 2004, p.226). responsive to the needs of the countries in New policies need to focus on Central and Eastern Europe where breaking the path dependency inspired by agriculture often represents a poverty the Soviet system and stable framework alleviation strategy and a development conditions are a prerequisite for the trust in strategy for agriculture is needed most (p. all reform policies. In this regard, measures 3). which do not interfere with market Since the enlargement in 2004, mechanisms can be recommended in case Ukraine has become a direct neighbor of they also do not require transfers from the the EU. The EU-Ukraine Action Plan consumers but can be financed by public stipulates that „the pace of progress of the sources. These can include individual long relationship will acknowledge fully Putting Agricultural Competitiveness and Rural Well-Being On an Equal Footing 5 Long Term Strategies for Rural Ukraine______Ukraine's efforts and concrete and common values“. Concerning rural achievements in meeting commitments development, the Action Plan calls for the inclusion of environmental concerns in inter most probably remain one of the most alia regional development and agriculture contested issues during any future EU and asks for the adoptation of the new membership negotiations. In its efforts to land code which also enables foreigners to further European integration, Ukraine can attain Ukrainian land. draw on the experience of the enlargement Already today, a close association procedures in 2004 and 2007. Especially between Ukraine and the EU exists. Poland has had a similar initial position. Ukraine trades most of its agricultural This means that the country should produce with the EU and not anymore with embark on a reform course before . Whereas Ukraine mainly exports membership negotiations start. As stated commodities and intermediate products, it in the first two parts of this paper, Ukraine imports final products from the EU still faces many challenges and also rates (European Commission, 2009). For the EU, comparatively weak in relation to the other an even closer association in the Central European states, especially when agricultural sphere might be especially considering its advantageous soils (see interesting in light of the scarcity of animal figure below). Once reforms have led to feed. However, EU quality standards still results in the first requested target areas, differ from those in Ukraine. Ukraine can consider to ask for support The approximation to and integration programs like SAPARD or LEADER+. in the EU's Common Agricultural Policy will

Selected comparative economic indicators for Ukraine and the new EU members

Ukraine Hungary Czech Slovak Poland Rep. Rep. GDP per capita, 2004 6,317 16,639 19,381 14,519 12,881 (US$ at PPP) Agriculture value added per 1,400 3,991 4,444 n.a. 1,397 worker, 2003 (2000 US$) Cereal yield, average 2001-03 2,4 4,0 4,3 3,8 n.a. (tons/ha) Sun flower seed yield, average, 1,2 1,8 2,2 2,0 n.a. 2001-03 (tons/ha) Rural population 33 34 26 42 38 (% of total, 2003) Food exports 13 7 3 4 8 (% of merchandise exports, 2002) Employment in Agriculture 20 6 5 7 19 (% of total, 2001) Agriculture value added 15 4 4 4 3 (% of GDP, 2002)

Source: Lerman et al., 2007, p.37

Putting Agricultural Competitiveness and Rural Well-Being On an Equal Footing 6 Long Term Strategies for Rural Ukraine______Although also Poland had been mostly the countries allocating few assessed as slow reformer, it was still seen resources to their agricultures whose as much more reform-oriented than support is organized most effectively. Ukraine. The seemingly unwilling reforms Although the changeover to a new until 2000 contributed to a sharp decline agricultural and rural development policy and very slow recovery of Ukrainian may be costly at the start, it will strengthen agriculture (Lerman et al, 2007, p. 41). the sector due to the development towards Like the WTO accession, further competitive structures in the long run. Price European integration will lead Ukraine political measures on the contrary further towards more open trade policies. However, slow down the structural adjustment those will not only have positive results. processes and make the producers Farmers and workers in industries which dependent on subventions. are expected to contract over the years to In order to stop the marginalization come will suffer from the developments and of rural areas, research on agricultural it is for these people that rural development development should be encouraged. Rural strategies need to focus on off-farm development can no longer be equated with employment. At the same time, the agricultural development but rather Ukrainian state needs to be aware of the represents a continuum to the urban space. arising interest of foreign investors. Foreign When this understanding is established investments need to be coupled with clear among the population, rural livelihoods may conditions in order to ensure positive be more attractive for the younger results for both contract partners. generation as well. Although more professional working methods are welcome, Conclusion Ukrainian policy makers should not grant Ukrainian rural development has taken on them access at any price and be cautious new forms since 2000. Set in a European towars foreign 'land grabbers'. Foreign comparative perspective, it needs however investment thus needs to be reflected to be acknowledged that up to today, large critically. parts of the Ukrainian agriculture are The prevailing lack of competitiveness organized according to the Soviet model, in the agricultural sector can also be with many small farms sharing a tiny understood in an optimistic way, namely as proportion of the total agricultural land and starting point for growth and hope in the few large farms having the control over an international food crisis. Often described as area that is proportionally out of scale6. possibly being one of the rising stars of In light of the economic crisis and the Eastern Europe, Ukraine should take the large part of their budget that households initiative itself and play on its potential. allocate to food in Ukraine, it becomes clear References and Further Reading that agriculture may not be regarded in complete separation from other policy Cooke, J. (2009). Ukraine's agricultural sectors. Food price inflation can not be revolution. BBC. Retrieved January 5, 2010 tackled at the rural development level only; from Ukraine needs new integrated policies http://news.bbc.co.uk/2/hi/programmes/ne which aim at an overall sustainable wsnight/8218081.stm development. Rural development and agriculture constitute a part of this European Commission (2009). Ukraine's strategy, not more and not less. This also Agriculture: Harvesting the potential? MAP means that supporting rural development Monitoring Agri-trade Policy. Brussels: EC can not be measured by the budget DG Agriculture and Rural Development. allocated to the field. By contrast, it is Galushko, V. & S. Cramon-Taubadel, von (2004). Agricultural Productivity Growth: A 6 In 2006, 5.5 million farms with an average size of Vehicle for Rural Poverty Reduction in only 2.8 hectares occupied 43% of the agricultural land (European Commission, 2009) Ukraine? In Petrick, M. & P. Weingarten Putting Agricultural Competitiveness and Rural Well-Being On an Equal Footing 7 Long Term Strategies for Rural Ukraine______(Eds.), The Role of Agriculture in Central Lissitsa, A. & H. Strubenhoff (2005). Die and Eastern European Rural Development: agrarpolitische und rechtliche Basis der Engine of Change or Social Buffer? (pp.220- Förderung der Landwirtschaft in 236). Studies on the Agricultural and Food Deutschland und der EU unter besonderer Sector in Central and Eastern Europe, Vol. Berücksichtigung von Export- und 25, Halle: IAMO. Kreditsubventionen im Hinblick auf die Regeln der WTO. Beratungspapier No. 1. Lerman, Z. (2007). Land Reform, Farm Kiew: Deutsch-Ukrainischer Agrarpolitischer Structure, And Agricultural Performance in Dialog. CIS Countries. Discussion Paper No. 7.07. Rehovot: The Hebrew University of Petrick, M. & P. Weingarten (2004). The Jerusalem. Role of Agriculture in Central and Eastern European Rural Development: An Overview. Lerman, Z., Sedik, D., Pugachov, N. & A. In Petrick, M. & P. Weingarten (Eds.). The Goncharuk (2007). Rethinking Agricultural Role of Agriculture in Central and Eastern Reform in Ukraine. Studies on the European Rural Development: Engine of Agricultural and Food Sector in Eastern Change or Social Buffer? (pp.1-20). Studies Europe, Vol, 38. Halle: IAMO. on the Agricultural and Food Sector in Central and Eastern Europe, Vol. 25, Halle: IAMO.

Disclaimer All opinions contained herein are those of the author, which may not coincide with the views of Friedrich-Ebert-Stiftung.

Фонд ім. Фрідріха Берта

Представництво в Україні Author вул. Пушкінська, 34 Fabienne Pradella is a student in European 01004, Київ Studies at the University of Maastricht. In Україна autumn and winter 2009, she completed Тел.: +38 044 234 00 38 an internship at the FES Regional Office Факс: +38 044 451 40 31 Ukraine & Belarus. This report was [email protected] prepared during her time in Ukraine. www.fes.kiev.ua