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Working Paper No. 9506

NEW STYLE OF AGRICULTURAL COOPERATIVES IN THE FORMER SOVIET UNION

by ZVI LERMAN

vaiie ,_ibrary )ept. of Applied Economics !niversity of Minnosota 994 .Eiford Ave - 232 ClaOff 1JIAAN 5510a-8040 USA

Rehovot, Israel, ROB. 12

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Working Paper No. 9506

NEW STYLE OF AGRICULTURAL COOPERATIVES IN THE FORMER SOVIET UNION

by ZVI LERMAN

THE CENTER FOR AGRICULTURAL ECONOMIC RESEARCH P.O. Box 12, Rehovot NEW STYLE OF AGRICULTURAL COOPERATIVES IN THE FORMER SOVIET UNION

Zvi Lerman Department ofAgricultural Economics and Management The Hebrew University ofJerusalem, Israel

Paper prepared for the meetings of the Canadian Association for Studies in Co- operation Structures and Cultures of Co-operatives, University of Quebec in Montreal, Montreal, Canada, June 7-9, 1995. • NEW STYLE OF AGRICULTURAL COOPERATIVES IN THE FORMER SOVIET

• .• UNION' •

Zvi Lerman Department of Agricultural Economics and Management The Hebrew University. of Jerusalim,. Israel •

The 15 countries of the former Soviet Union span nine time zones, with Eastern and Central Europe (without former Yugoslavia) adding 8 more countries in a tenth time zone to the economic and political block that during decades was dominated by the USSR, and more directly by Russia as the largest member and the main ideologue of the Soviet Union. EVen.Withthit the. enormous expanses ,of,.northern Siberia that are largely unpopulated and uncultivatable, this economic,space aCeounts .for 20% of the world's farmland and 8% of the world's population (FAO 1994). Agriculture is a very large sector in'the region, With a share of 15%-20 70: of total GDP and a correSpon*gly high share in total employment and productive assets (CWd and Lerman 1994; Brooks. thul Lerman 1994a). - • Agricultural cooperation has a long tradition in RiiSsia,.. and to a certain extent throughout the rest- of the region. In Tsarist Russia the 19th century was characterized by so- called communal agriculture. The Russian village comniiine. as an institution dates back to the 1lth-12th century, and it survived serfdern: The. Emanaipatitin Act of.1861 - abolishing serfddiri transferred land ownership to the village commune (obshchina), not to individual peasant.- Since then, until Stolypin's reforms of 1905 which reinstated individual land ownership, all pastures, meadows, and forests :Were. held in common, while the fields were parcelled 'out among the households and periodically. redistributed to suit the changing -nUmber and Composition of families and to ensure equitable allocation of plots of different Soil quality. The commune was obliged to allot land to all its Members, regardless of their Particular occupation or farming practices, and each peasant was entitled to participate in tl6liberatiOns and decisions on every aspect of life m .the commune — "from the choice., of 'a shepherd • to • the distribution or redistribution of the fields or the purchase of additional land" (Fitzlyon andi3rowning 1992). Periodic redistribution, strong equity*prhiCiples, and cdltective responsibility for village affairs led Aleksander Chayanov, the Russian th&O.rist.of coapdation in the 1920s, to speculate that Russian peasants operated as satisficers and 'gave priority td-Auity considerations within the family and the commune (Gregory 1994). . . .• common use• of land and a tradition of communal decision making, albeit not entirely .yoluntary in their. origin, proyi0ed.a fertile soil for the development of cooperatives in rural communities in„the .region. . The history of cooperation:hi Russia and the former Soviet Union can be .clearly divided into four main stages:.

.--.t4e era beforethe. 1917 Revolution, - the period of the New Economic'Policy i921:1929;'. .'• . •

1 Paper prepared for the meetings'of the Canadian Association.for Studies in • . _ • _ . Co-operation on the subject of Structures and Cultures of Co-operatives, University of Quebec in Montreal, Montreal, Canada, June 7-9, 1995. • : - the collectivization decades 1929-1991; - the post-Soviet period.

The countries of Eastern and Central Europe, with their own 'system of agricultural cooperatives that has been developing in fits and starts since the middle of the 19th century, joined the Soviet-dominated block in 1945, after the end of World War II, when they were forced directly into the collectivization stage. Since 1990-1991, the agricultural cooperatives in these countries has also entered a new phase of evolution. •

Pre-1917. Period

Agricultural cooperatives (other than the traditional village communes) began to develop in. Russia....a*ls-,astern Europe in 1860s-1890s, soon after the introduction of cooperative principles in Western.Europe. Slovakia has the reputation of being the first country in. continental Europe where a "farmers society" was established only:50 days:aftek;thel- establishment'of the original. Rochdale Pioneers cooperative (Spear 1993). The .19th .century:cooperatives in the region were mainly societies or associations of peasants -specializing in_the:traditional- activities of credit, processing, input purchasing, and .farm product marketing: A source from 1895 describes in vivid terms. the initial development of agricultural cooperation in Russia (Prokgauz- Efron 1895):

Small landowners join forces to establish a mill, a cheese-making dairy, to buy cattle, to cultivate a meadow or a forest, to drain. a .marsh.-. There are also , societies that pursue the development of one particular.-agricultural. enterprise, such as processing of dairy products, wine making; etc. -Recently, farmers' societies were established, in Perm'. Province, with the assistance of- local government, with the object of joint purchase of horses, improved seeds and . implements, and joint processing for all. or,some of the members. Such societies werealso established in Kherson Province [in south-eastern Ukraine]. Farmers' societies for the purchase:and marketing of products (which are very common in France) began to be established in Russia only in 1890, and today [1895] their number does not exceed 6.

By 1915, there were 23,700 agricultural cooperatives in Russia, of which 60% were agricultural credit cooperatives (GSE 1953, vol. 38, p. .444). The development of, credit cooperation began in the rural areas, where its function was to help the millions of "poor" and: "middle" peasants avoid resorting to expensive commercial credit (Savchenko 1991). Just before the revolution of October 1917, some 10 million Russian peasants were members in 16,500 credit societies and over 2 million were members in 12,000 other agricultural cooperatives (GSE 1973, vol. 13, p. 107); over 90% of Siberian butter was'produced and marketed at that time by a union of cooperative creameries, with a membership of nearly half a million producers and . 3,000 creameries (Epshtein 1993). These pre-1917 cooperatives, however, were not particularly long lived: once the members had built up'theitinitial Wealth through cooperation ("had bought horses and farm implements"). they- tended to leave:the association and the cooperative would' eventually dissolve(GSE 1973, vol. 13, p. 107).

2 The information on agricultural cooperatives before 1917 in other parts of the Russian empire is, scant (Serova 1991). In Ukraine, the development of cooperatives paralleled that,in Russia (see the reference to Kherson Province in the above quotation from 1895). Belartth,. on the other hand, appears to have been a "cooperative desert" before .the 1917 Revolution. Among the Caucasus states, only Georgia had significant cooperation before 1917: some 250.credit societies, as well as unions of grape growers and wine .makers, fruit growers, sheep breeders, and tobacco growers. Wine making in Georgia was,. virtually 100% cooperative at that time. The commercially oriented cotton industry in Central Asia seems to have created favorable conditions for agricultural cooperation: credit cooperatives began to emerge in 1912 in Turkistan The Baltic region has the longest history of cooperation in the;former Russian empire,.and the first agricultural societies in the 19th century were actually established in these countries: The development of large-scale credit cooperation was followed. by :farm 'machinery and animal breeding societies, as well as cooperative creameries. Potato and peat marketing cooperatives were common in Estonia. In 1914,.Latvia had over 900 agricultural .societies organized in 8 cooperative centers. The promising agricultural base of the Baltic states, however, Was totally destroyed during World War I.

The NEP Period 1921-1929

Russian cooperatives resumed their development in 1921, when the turmoil of the October 1917 Revolution and the subsequent Civil War had subsided. An enabling condition for the continued growth of cooperation in Russia was Lenin's ideological support of the cooperative movement as the road of the peasant class- to socialism. A government decree of August 1921 on agricultural cooperation allowed peasants to create agricultural cooperative societies and associations of all• forms. No less important •was the relatively permissive- and tolerant atmosphere under the New Economic Policy (NEP), which sought to improve the economic conditions after the hardships of "war communism" by emphasizing and encouraging individual business initiatives in a socialist environment, .

Table 1.• Growth of Selectecl. Categories of Agricultural Cooperatives in Russia in the 1920s•(thousands)

Type of cooperative society 1924/2 1928129 .. • •.., . • ..• . .,...•- 6.3 s ''... '" /..0 :Credit. :. • - i Farm machinery . .2.2' • ..19.9 .' Soil reclamation ' _ ... 3.4 •• ..: §. •,• .LiveStock • : -1.0 .,. :_:-..5. . PrOcesiingsand-Marketing . 3.7. ,:,,... •••• ,. 9;6, - • Universal • . * 1-1.1 ' ...'—'.. 6:0-. -

Source: GSE (1953), vol. 38; p. 444.

•

The number of Cooperative associations increased rapidly between 1924 and 1928(Table 1), and by 1929, on the eve of Stalin's collectivization campaign, 13 million or over 55% of individual farms in the Soviet -Union were. members in more than 100,000 cooperatives of •

3 various types, which included credit associations, farm machinery associations, soil reclamation associations, livestock associations, and processing and marketing associations(GSE 1953, vol. 38, p. 444). Flax processing and marketing, as well as butter, starch, and molasses production were predominantly cooperative activities at that time. The share of cooperatives in procurement of farm products (both crop and livestock) in the 1920s.is shown in- Table 2.• Cooperatives accounted for 15% of all Soviet exports by 1929 (Epshtein 1993), exporting over 50% of butter and 30% of flax (Serova 1991).

Table 2. Share of Agricultural Cooperatives in. Total-Procurement-in the Soviet Union; % . • . . . 19244925 •19264927' -1927-1928 ast , . • . half) ,, • Sugar beet 48 85 . 96 e • Makhorka 25 88 100 Tobacco .... 65 71 Cotton 60 99 97 Flax 19 35 56 Grain 7 28 35 Butter 44 . 68 72 Meat .... 34, 48 Wool 21 •. . 36 : - 66 Eggs '27 . - - 43 52

Source: Serova (1991).

• • A new feature characterizing the post-1917 stage in the evolution of Russian cooperation is the rapid emergence of national cooperative unions. Prior to 1917, the only central agricultural cooperative organizatioris.included the Union of Siberian Cooperative Creameries.(established in 1907), the Central Association of Flax Producers.(established in 1915), and the Moscow People's Cooperative Bank (established in 1912).1 During the. decade after 1918; specialized cooperative unions were created also for fruits and vegetables, potatoes; hempseed,- grain, sugar beet, livestock, dairy, rope, eggs, grapes and Wine making, tobacco, etc. .These national organizations often initiated and guided the "top-down" creation of local- and regional cooperatives of corresponding specialized profiles. By 1927, the national cooperative unions supplied 80% of farm machinery, 50% of tractors, and virtually all the fertilizer to the rural sector; in return cooperatives marketed well over half the output of specialized crops and a third of the grain harvest(GSE 1937, vol. 34 pp 219-220; Savchenko 1991; Serova 1991). The growth of cooperatives in the MQs was. not restricted to Russia. In Ukraine, the number of agricultural cooperatives sincreased from 8,000 with 390,000 members in 1923 to 26,000 with 3.1 million members(60% of peasant farms) in 1928 (Ukraine 1980). The Central Bank of Ukraine for Agricultural Credit was established .in October 1923, and its lending volume increased five-fald in one year (Bakumenko 1960):In - other republics of the USSR agricultural cooperation also -received a considerable boost(Serova 1990.- The general trends paralleled those in Russia and Ukraine, with allowance for speCifia local onditions (e.g., emphasis on livestock

4 and dairy cooperatives in the Baltic republics and on cotton marketing cooperatives in Central Asia). The available data by republic are quite fragmentary, and Table 3 is an attempt to summarize the published information. It is clear from Table 3 that numerically the Russian cooperatives represented the lion's share of Soviet agricultural cooperation in the 1920s.

Table 3. Selected Data on Agricultural Cooperatives in Some Soviet Republics in the 1920s

Republic Year Number of cooperatives Percent ofpeasants in cooperatives

Ukraine 1926 16,000 ag coops 30% • 1928 26,000 ag coops, 3.1 million members 60%

Georgia 1924 67 ag societies, 15.8 thou. members 15%

Azerbaidjan 1925 8% - Armenia 1925 6%

Belarus 1924 115 ag societies in 1 union

Central Asia 1920 12 credit unions, 1,500 ag societies 50% (mainly cotton marketing) 1925 water and soil reclamation 1070'

Latvia 1923 75% of butter industry

USSR total 1928 Over 100,000, 13 million members 55%

- Source: data for Ukraine from Ukraine (1980);. other republics based on Serova (1991).

Another feature of'the1920s was the spontaneous and completely .61dritary emergence of agricultural production Cooperatives under various names, which included an updated version of the traditional "cominune,'' the generic "farming association" -(zenitederchesicaya artq'), "society for joint cultivation of land" (TOZ), and finally "collective farm" .(kollektiiiioye khozyaistvo, or kolkhoz). These early production cooperative's were create.d..byipe•asants, pooling together their small allotments ofland; or sometimes joining'Without . anylahd:,at..all.. They were intended to act as the primary Iiiik ofthe vertically integrated system of agricultural cooperation that was developing in Russia and the rest of the Soviet Union at that BY1927, there' were 14,800 such production cooperatives With:194,700 *member farms Of the total number of peasant'farms) (Table 4). Their •contribution to agricultural prOduction-WaS..insiitiificant: slightly over 1% of gross product and 1.7% of grain purchases *by. the gOverrunOt(Serova .1991). • The 1920s also witnessed the crystallization of Lenin's "cooperative 'program", which. -advocated cooperation as' an intermediate stage for.the.ainverion Of the inherently conservative and individualistic peasants to socialism: The initial stage of cOoperation, according to Lenin, starts as individual farmers and entrepreneurs begin to recognize the advantages of the cooperative mode of operation. This leads to gradual and voluntary combination of tens of millions of small individual farms in the ,simplest forms of cooperation, such as consumer cooperatives, purchasing and marketing cooperatives. These simplest cooperatives prepare the

5 ground for subsequent transition to the higher form of production cooperatives. The highest form of production cooperatives are the collective farms,'which in themselves are but a transition stage to the ultimate socialist structure, the state farm (GSE 1953, vol. 22, p.518; GSE 1973, vol. 13, p. 109). Lenin's cooperative program provided the philosophical basis for the tolerant and sometimes even supportive attitude toward the cooperative movement in the Soviet Union in the 1920s. In 1929, it was invoked by Stalin as the ideological justification for the collectivization campaign.

Table 4. Production Cooperatives in Soviet Republics on the Eve of Collectivization

Year USSR Russia Ukraine Belarus Trans- • Central Caucasus Asia Number of cooperatives (thousands) 1927 14.8: 8.3 5.6 0.4 0.1 0.4 1928 33.3 21.6 9.7 0.6 0.6 ' 0.8 Percent ofpeasant farmsteads in cooperatives 1927 0.8 0.7 1.4 0.6 • 0.2 0.9 1928 1.7 1.6 2.5 0.7 1.0 1.7

• Source: Sellhoz (1935). •

Collectivized Agriculture

The NEP with its atmosphere of relative entrepreneurial freedom and tolerant attitude toward private initiative abrupt1S, ended in 1929 as the Soviet Union switched to Stalin's total collectivization campaign. The collectivization of agriculture was viewed by Stalin as an urgent necessity in a rapidly industrializing 'country, where the urban ,population was .growing at. unprecedented fates and the rural sector had to 136 reorganized in a new mold to ensure sufficient food deliveries to the city masses. The collectivization drive was couched in terms of the Leninist cooperative program, stressing the advantages of cooperation.-and emphasizing voluntary membership. Yet in practice the drive. bad all the elements of forced conscription, reinforced by political and physical intimidation. Stalin managed to infect with his single-mindedness all the Party echelons throughout the Soviet Union, and collectivization of over 20 million peasant households was virtually completed within less than a decade (Table 5). The class structure of Soviet society changed dramatically, as the category of "collectivized!' peasants increased from 2.9% of the Soviet population in 1928 to 57.9% in 1937 (Narkhoz 1956). The number of collective farms peaked at nearly a quarter of a million in .the mid-1930s. After that, the policy of aggregation steadily reduced the number of collective farms, bringing it down to around 30,000 in the 1970s-1980s with a proportionate increase in size (Narkhoz 1979). •

6 Table 5. C011ectivization of Agriculture in the Soviet Union

• Year Number of Percent of Percent of Percent ofgross collectivefarms* farmsteads* sown area* product**

- 1927 . 14,800 0.8 '1928 t .33,300 1.7 1.2 11929,7 't 57,000 ' 3.9 3.5 - 3.3 1930...... 85,900 • 2370 , 29.9 1931 211,100 .52.7 . 57.9 . 1932 . 211,100 _ . 61.5 68.1 51.1 1933 224,500 . 64.4 72,.2 . -1934 233,300 71.4 75.0 1935 249,400 - 86.8_ 78.7 - - 1937 . 243,709& 93.0+ 85.6# • • 62.9 . 1939 235,300+ 95.6+ • ...... ;:, 1949 236,900++ 969++ . 782++

Note: The percent of sown area in collectives is calculated here in relation to the total sown area in the USSR in each year. As a result, our numbers are significantly lower than the percentage of collectivized sown area traditionally cited in Russian sources, which is calculated on the basis of the land in peasant farmsteads, excluding lands cultivated by the state and other users. The traditional calculation method gives the collectivized sown area as 99.1% already in 1937, and the percentage continues increasing to 99.g% thereafter. • . Sources: * Serkhoz (1935), pp. 630, 634, 1337, 1369 (for years 1927-1935); -.IL Narkhoz (1987), p.35 ++ Narkhoz(1972), pp. 215, 240; # SocAg (1939), p. 58, data for 1938; ** SocAg (1939)'(1939), p. 87; & GSE 1953, vol. 22, p. 81 (1953).

Since mid-1930s, the collectivized agriculture of the Soviet Union was characterized by a specific duality of structure: most of the commercial production originated In the socialized sector, which consisted of large-scale collective farms (kolkhozes) and state farms (sovkhates); this sector coexisted with a quasi private sector of subsidiary household plots cultivatedby collective-farm members and state-farm employees, the output of which was Used mainly for subsistence. A typical collective or state farm in the 1970s had 400-500 members and thousand hectares of farm land, about half of which was collectively cultivated "arable land (Narkhoz _1979). A subsidiary household plot, on the other hand, averaged*O.:25 ha and was ' always regarded as the family s property, although legally the land was state owned Although the household plots cultivated less than 2% of land, they consistently accounted for 25%-30% of agricultural gross product in the USSR, basically in livestock and potatoes and vegetables (Lerman et al. 1994). . The Standard Charter of a collective farm'," which since the early 1930s had the force of law in the USSR, is a model of cooperative principles in print. It speaks in glowing terms of the kolkhoz as a "form of agricultural production cooperative of peasants that voluntarily unite for the purpose ofjoint agricultural production based on ... collective labor." It asserts that the kolkhoz is managed according to the principles of socialist self-management,'democracy, and

7 openness, with active participation of the members in decision§ concerning all aspects of internal life" (Ustav 1989, pp. 4, 37). .• , • . Yet like all other economic entities in the Soviet Union, the collective farms did not have any true freedom of decision or operation. They were part of a.centrally..planned economy, and all their activities — both economic and social — were prescribed from the center and,rigidly monitored by the authorities. The individual members did not have.much room for -'personal initiative in this environment, and their work load and time allocation were rigidly prescribed by the manager and his team of technical specialists in response to centrally imposed plans and targets. Although the Standard Charter vested the kolkhoz general assembly with full power to decide on all aspects of cooperative life. (Ustav 1989,.pp. 37-38), in practice its decisions were subject to approval by the local auth9rities, who. often proposed the agenda for the general assembly and suggested the "correct" decisions. Suffice it to say that while a typical Clause of the Standard Kolkhoz Charter vests-the general assembly of members with the power to elect or fire the manager (Ustav 1989, p. 38), some versions of the Standard'Charter to this very .day contain .a clause according to which the local district or province authorities can remove the

manager if they find him or her unsatisfactory (Ustav 1994). • In practice, the collective farm that emerged after Stalin's collectivization campaign did not have many characteristics of a true cooperative, except joint ownership of non-land assets (the land in the Soviet Union was nationalized in-1917) and remuneration in proportion to labor and not capital from residual profits. Thus, the basic. principle of voluntary, membership had. been violated by the very process of forced collectivization, members. did not retain a right of:, free exit, and those who managed to leave could not take their share Of land and assets with them (neither in kind nor in cash-equivalent form);.the role of the "sovereign" general assembly and the'democratically elected" management in fact reduced to rubber-stamping the plans, targets, and decisions of the district and provincial authorities, who together with imposition of detailed.: work programs also nominated the preferred. managerial candidates (Semchik 1991; Serova 1991). The collective. 'farms very rapidly .metamorphosed from cooperatives to a Mere offshoot of the state sector. As.a result, there were many instances Since mid-1930s of collective farms - changing their status to state farms or vice versa, depending on current taxation policies and * other discriminatory practices. applicable to workers in the two categories of farms. The faint dividing lines between Collective and state farms were obliterated almost totally in the late 1960s, when Khrushchev's administration authorized a guaranteed wage to. members of collectives,. similarly s to: state farm employees., thus in fact recognizing their actual status as hired hands rather than Cooperative members.. Tli.guaranteed. wage provision was actually incorporated in the 1969 version of the *Standard Charter.: . • An important feature Of the Sq*iet. system was the leading r.o.10 that collective and state farms had in provision Of social services to the rural sector; Collective and state farms assumed the responsibilities of both local government and central. governmenti in provision.of.d.ay care, education, health care, transportation, vacations, housing services,and . facilities,' consumer trade, etc They were eventually reimbursed from the state budget in one way or another, but the actual responsibility for making sure that all the services Worked in the rural areas was theirs. This non business activity was much more extensive and pervasive than similar activities of various Western cooperative organizations aimed at the genefal,.welfare.of their members,. However, in the USSR it was clearly not a manifestation of a poOperative.ethic,...ecause- collective and state farms, as Well as all other rural employers,.shared tese. responsibilities as part of the prevailing political system...

8 The socialization of Soviet agriculture in the 1930s made redundant the tens of thousands of.credit, marketing, and service cooperatives.that had developed during the 1920s. The collective and state farms evolved into multifunctional rural organizations that'took care of large-scale • agricultural production and also interfaced directly with Ideal and central government on matters of farm input supply (which replaced "input purchasing"), product deliveries (which replaced. "marketing!'),: and residual financing from the state budget (which replaced credit negotiations). The Soviet cooperative system lost the "outward" vertically integrated structure. • • that began. to emerge in the 1920s, and turned • "inward" to strictly hOrizontal .integration of... agricultural production activities in large-scalelarins. The disappearance of credit and service • • cooperatives was accompanied by acrimonious accusations of "anti-socialist behavior" of cooperators, a common argument brandished in the 1930s against political protagonists. As always in the Stalinist .period, the elimination of institutions 'proceeded hand . in hand with physical extermination of intellectual leaders of the discredited sector. Thus, the great Russian . theorist of cooperation, Aleksander Chayanov, who had played a major role in the establishment • of agricultural cooperatives in the.1920s; was arrested in 1930 on political charges and spent 7 . years in various prisons until his execution in 1937. An interesting new cooperative stream, emerged.in 1954-1956, possibly in, an attempt to reinstate some links in the vertical integration chain of agricultural cooperation. These were • so-called interfarm enterprises (mezhkhozyaistvennyye predpriyatiya), regional cooperative ventures established by local kolkhozes and sovkhozes for highly specialized activities, such as feed lot operation or agricultural processing. The number of interfarm enterprises increased from around 3,000 in .1965 to over..10,000 in 1985, and their activities branched out to various • agricultural services, such as construction, mechanical works, electrical power stations, artificial insemination units, and even resorts and homes for the aged Virtually every collective or. St* farm was a member in one or more of these regional enterprises. Interfarm enterprises were initially conceived as true second-order cooperatives. However, the administrative command' system quickly "took over" the new initiative and converted them into just another category of state-run enterprises, despite the cooperative structure of ownership. The Soviet model of agriculture that emerged'in the process of collectivizationtuiing• the 1930s was automatically imposed by the USSR upon the countries of Eastern and _Central Europe after WorldWar II. Collectivization of agriculture in these countries was part of an extensive process of land reform, which includeddistribution oflarge estates to smallholders. Contrary to 'the Soviet - Union,. which eliminated all private landS ownership immediately in October. 1917, .land in. these :countries.. was never, completely 'nationalized., and •prOdUCtiOn cooperatives were created on private land contributed by joining members. The:original land- ownership records of cooperative members actually •survived in these COUntries to this all other respects, therproduction - cooperatives in Eastern'and Central Euriipb. Were basically similar to Soviet collective farms: these were large-scale horizontally integrated multifUnctional entities operating in a 'centrally controlled environment, which had a responsibility;f6r - both-- economic and social aspects of rural Communities and whose members.Were laitely treated as hired hands. The collectivized -agriculture in Eastern and Central Europe developed the same duality as Soviet.agriculture, with large-kale production 'cooperatives coexisting •symbiotically • - with small household.plots of their- members; ..'‘ • • • ••• • • • .,Table 6 IllUstrates, the very large share. of Soviet-model C011ective farms in the agricultural'sector of most countries in. the regiOti. The .difference fo 100.70' is largely made up by state -farms, not the quasi-private household- plot • Sector.• A .notable exception' in EaStein •,. • • - '

• 9 , Europe was Poland, where collectivization had not been forced and agriculture remained largely based on individual peasant farms(a similar system prevailed in Yugoslavia). Without large scale multifunctional Collectives, Polandietained a relatively receptive environment for agricultural service and credit cooperatives. In 1970, the Polish marketing cooperatives purchased over 75% of farm products from peasant farms(GSE 1973, vol. 13, P. 106). In general, throughout the rest of the region, various service and consumer cooperatives have not been as completely eradicated as in the USSR. In Hungary, 70% of consumer services were provided by cooperatives; in Czechoslovakia, Romania, Hungary, Poland, and East Germany consumer cooperatives handled over 30% of all retail trade (1971 data)(GSE 1973, ibid).

Table 6. Share of Production Cooperatives in Comecon Agriculture(%, 1970 data)

USSR. BUL CZS HUN POL ROM GDR

Agricultural land 37.5 68.0 55.7 67.6 1.2 519 • 72.6 . Number of employed 64.2 58.7 60.5 75.5 0.9 ." 82.0 72.2 - • - Productive assets 42.4 56.7 47.9 .... 1.4 23.6 -- Gross product 40.0 62.6 53.2 45.8 1.1 42.3 State purchases: . grain 51.9 81.0 64.5 79.8 1.3 71.0 79.3 • . meat 33.3 44.7 50.0 .... ' 1.3 20.6 . -- milk 36.5 59.7 53.4 43.3 0.6 28.7 ....

Source: GSE 1973, vol. 13, p. 102.

Reinstatement of Cooperation 1985-1990 '

The Soviet-model collective farms persisted largely unchanged until mid-1980s. In a gigantic region with_tremendous geographic and ethnic diversity, the farms were curiously uniform in their organization and operating principles, a consequence of pervasive central controls in a command economy. The collective (and state) farms were consistently promoted as the only acceptable form of organization for socialist agriculture. Yet despite the propaganda and the ideology, the endemic food shortages in,the region provided clear signals of economic inefficiency of the Soviet model of agriculture. This is not surprising, as the collectives retained the behavioral weaknesses of cooperatives (e.g.,. free riding and.moral hazard) without their major strengths, which include personal involvement and,motivation stemming from private ownership, freedom of choice, and activeparticipation in decision making. Attempts at structural Worms in agriculture were begun by•Gorbachev in the 1980s. The reforms aimed to ensure greater freedom of choice :within the *Collectives, primarily by encouraging formation of internal "lease cooperatives", i.e. i!groups of people who jointly leased specific assets from the collective and voluntarily assumed direct responsibility for production with these assets (Brooks 1990).. In 1990; 63%,.of all collective and state'farms in Russia employed some form of lease contracts with their,members, and as many as 9% of the farms had shifted to lease arrangements in all their activities. "Lease cooperatives" in all categories accounted for 25% of workers in Russian collective and state farms (Csald and Lerman 1993).

10 However, without radical changes in the economic environment and specifically in the absence of basic market services, these "lease cooperatives" were"obliged to sell their output to the collective and depended on the collective for most of their inputs.. The Operating independence of the "lease cooperatives" in the 1980s was very limited, and this largely predetermined the ultimate failure of Gorbachev's initiative in agriculture. '• • In the 1980s, the internal "lease cooperatives" in agriculture were not organiied as independent legal entities: they were subdivisions of large-scale colleCtive farms, accountable to the kolkhoz manager. Yet they emerged in a decade when the USSR again recognized legally the cooperative form of organization and allowed an outburst of cooperative activity in all spheres of the Soviefeconomy. In 1986-1987, the Soviet government adopted a resolution on the creation of cooperatives in certain spheres of the economy-(mainly processing, production of consumer goods, consumer services, and retail trade). The intention was to provide a new channel for productive employment of the inactive population, such as housewives, invalids, and students.. These early cooperatives were severely limited in their scope .of operation and could not be established without the explicit approval of local authorities, which furthermore were given powers to restrict the activity of the new cooperatives at their discretion (Savchenko 1991; Semchik 1991). ••••• •

Table 7. Development of Cooperatives in the USSR: 1987=1990 (end of year, thousands)

1987 1988 1989 1990

All cooperatives 13.9 77.5 193.1 245.4

Agricultural cooperatives* NA 2.1 8.5 10.4 Construction NA 3.4 38.7 75.5 . Consumer goods manufacturing 3.3 16.2 33.7 41..8 Consumer services 5.3 23.7 . 32.6 27.6 Restaurants 3.0 7.6 5.7 4.6 Trade and secondary processing NA 7.3 10.8 10.1 Health and resorts NA 2.5 5.0 5.0 Travel and leisure . • '- NA 2.2 ' • 4.1 4.1 Art, science, engineering NA 4.2 18.0 21.8 Industrial goods manufacturing NA 0.4 - 5.8 8.9 Other 2.3 7.9 30.2 35.6 * Cattle and poultry feed lots, fish ponds, vegetables, flowers, mushrooms, and other production. Source: Narkhoz (1990), p. 56.

The administrative and economic restrictions were largely removed in May 1988 with the adoption of the USSR Law on Cooperation,, one ,of the first laws of Gorbachev's "perestroika" policy. The local authorities were no longer required to grant permission for the establishment of cooperatives, and could refuse registration only in cases of illegal proposed activity (Savchenko 1991; Semchik 1991). The new legislation immediately led to an explosive . growth in the number of cooperatives in Russia.and the other republics (Tables 7 and 8). The main cooperative activities were consumer .services, including food services, production of consumer goods, construction, intermediation, and professional services. Agricultural cooperatives do not figure prominently among the 245 thousand registered cooperatives in January 1991: they constituted only 4% of the total, because new forms of cooperation in agriculture were mostly developing internally, as organizational subdivisions of collective farms. The proportion of agricultural cooperatives was substantially higher than the average in Central Asia, Moldova, and Azerbaidjan .(Table 8). The new cooperatives were relatively small, employing on average 25 people and in agriculture only 1.1 (Narkhoz 1999).

Table • •• 8..bi.stribution . and Size. of Cooperatives by Republic for Jan. 1991

, All coops Agricultural coops

• 'number of employed, number of percent of employed, co'bps' -thou:sands coops. all Coops': 'thousands.

USSR 245356• • . 6098. 10406 • .118.0.

Russia 134594 3512 5018 3.7 58.8 Ukraine 34823 876 984 2.8 12.9 Belarus 6183 151 143 2.3 1.8 Moldova . 5257 113 333 6.3 2.8_ Central Asia Uzbekistan 9779 269 1054 10.8 .12.2 Kazakhstan 12441 276 1129 • 9.1 11.0

Kyrgyzstan 1727 38 243 14.0 1.8 ••• Tadjikistan 2425 56 160 6.6 1.6 Turkmenistan 1795 38 124 6.9 1.2 Trans-Caucasus Georgia 8711 178 234 2.7 1.8 Azerbaidjan 3930 74 267 6.8 3.7 , Armenia 10144 181 485 4.8 4.1 Baltics • Lithuania 4949 83 134 2.7 3.0 Latvia 5407 199 46 0.9 0.6 . Estonia 3191 _ 56 52 1.6 0.7

Source: Narkhoz (1990).

•• - Following the 1988 legislation, cooperatives became the only allowed alternative to state enterpri_ses.- Cooperatives retained this unique status until the adoption in 1990 ofthe USSR Law of Property, which recognized different forms of ownership, including private. Prior to that, in 1988-1989, cooperatives were regarded as a substitute for private initiative and thus attracted all those who sought freedom and entrepreneurship. Cooperative restaurants, cooperative shops, and . ••• cooperative enterprises that-sprang in tens of thousands all through the USSR in that period were•

12 basically private businesses- registered as cooperatives in order to exploit, the. new legal opportunities for: individual activity. . • The'main accomplishment of the first stage of cooperative development after 1988 was the appearance of new goods and _services - although'cooperatives failed to saturate the markets with goods,-aS originally anticipated. This positive accomplishment, however, was accompanied by unavoidably higher prices charged by cooperatives. As a result, the attitude toward the new cooperatives among the population was on the whole negative:. The. animosity was..further exacerbated by the feeling that cooperative members earn.excessive and unjustified incomes (2 to 7 times the average)(Sivchenko 1991). The spread of cooperatives almost immediately led to a legislative backlash,.inEne with the Soviet attitude to liberalization which always involved a-policy,orone_ step forward, two steps backward". Already in December 1988, a government resolution prohibited a whole range of activities for cooperatives, and together with narcotics and weapons excluded education, book publishing, cinema and video film production, medical care, etc. Some republics (most notably Uzbekistan and Kyrgystan, where new cooperatives were much less developed than in.Russia) used their local legislative powers to restrict cooperative activities,even further. In June 1990, the Soviet government reinstated the requirement of licensing by local authorities in an even more draconic form than before 1988: cooperatives now could be registered only with the explicit approval of a special committee of the local House of Representatives (Ivanova and Shashnov 1991). All these measures'are reported to have caused a large number of liquidations among existing cooperatives and a general slowdown in the creation of new cooperatives in 1990-1991 (Ivanova and Shashnov 1991; Savchenko 1991). The backlash against cooperatives, however, took place on the eve of the political changes that led to the dissolution-of the. Soviet Union at the end of 1991 and the beginning of a'declared transition to a market economy.

Post-Soviet Agriculture

• • • The emergence of new agricultural cooperatives in the former- Soviet Union since 1992 .3 • • is a byproduct of the agricultural sector reforms that began on the ,threshold of dissolOon,of the USSR and have continued in full forte after that. - • -. - . _ - - • . . . Collectivization of the rural sector was seen :as- necessary for achieving, the goal. of centrally planned command economies. It,was promoted as a.means pf.adcomplishirikeconprnies of size and moving the. "backward" agricultural..sector into .the modern-mechanize.4...ge...Yet the large-scale 'collective and state farms proved -.inherently . jpefficient, and the performance of socialist agriculture lagged behind that of market econornies..(Cook 1992; Easterly and.Fiseher 1994). A massive effort'is•now underway in this potentially.. rich agricultural region to eliminate', the constraining institutional arrangements kind to:create more.procluctive.forms of farming. This highly complex .effort is linked to a deep transformation ofthe.:entire irural.society,. • Although the scope of decollectivization,,in the process of..transitioni .,:to;..a.i,.rilarket economy extends'far beyOnd..land.and-farm..assets,:,the transformation begins with two basic processes: transfer and redefinition ofproperty rights in land and d,e0griatop„-pf..ownership.of .farm assets The beneficiaries of these processes are members and:workers.who contributed by their labor to accumulation of -assets' over the years (i1.1.,EaStern, and central Europe former owners whose. assets were collectivized after World 'War. II also. participate in the distribution),.

13 Property rights are typically transferred to members and employees .by distributing the collectively held land and assets into individual shares according to various entitlement-criteria: The share-distribution.process restores oneof the basics of true cooperation: the ability of each member to contribute voluntarily a share in the-tquity capital of the Cooperative. The transfer• of property rights is also usually -linked .with.the right of the individual to exit the reorganizing' collective with his family's share-of land and .assets. All this constitutes 'a dramatiC change compared to the traditional practice in collective farms, where a member would receive only his work book and his salary-related arrears on exit, while new .members were admitted after the forced collectivization stage without any share contribution (Ustav 1989). • Transfer of.property rights in agriculture must go hand in. hand with development of procedures that allow regrouping of the privatized land and assets according to the needs of the new owners-operators. Some of the regrouping takes place through individual transactions, such as leasing or sale contracts, if allowed. Much takes place through voting or agreements, in which individuals accept a new role in the existing collective, or create a new Organizational structure using their shares of land and assets from the former collective. Farm -restructuring in all its diversity is thus an inseparable component of the privatization process in agriculture.

Creation of Cooperatives through Alternative Restructuring Strategies

Farm restructuring may proceed along several alternative tracks, some of which. organically involve the creation of new cooperatives. The corresponding strategies are illustrated schematically in Figure I., which is based on observations of.actual trends and processes in various countries in.the region. "Stay as is/ The simplest and most conservative .strategy is to "do nothing". and "stay as is." Land and assets are distributed to individuals in'the form of paper shares, but this is not followed by physical allocation of individual entitlements. The recipients keep their shares of land and assets in the old collective, continuing the tradition of collective production. The collective may change its name to a cooperative of agricultural producers, a joint-stock society, a limited-liability partnership, or. some similar organizational structure, but it basically continues functioning as before. In principle, the "shareholders" should be motivated to adopt a profit orientation in. order to maximize dividends- on their shares, but the new 'incentive structure has not been truly implemented in these organizations. Neither- dividends'-nor shares have Much practical significance yet, and the shares are not tradeable. In the .absence .of an appropriate incentive structure, no true sense of ownership is created, and the shareholders continue working as salaried employees under the direction of their previous collective manager. These "new-old" structures retain all the weaknesses and inefficiencies of collectives, although they are often expected to be more efficient because of their modern-sounding -names and new charters Yet even these flawed structures are closer to true production cooperatives than the traditional collective farms: the members now have a meaningful option to leave with their share of land . and assets and can decide to-stay out of their own.free -will. Hopefully this fundamental change of conception and attitude'will induce deeper restructuring in the future. _ "Complete Dismantling.." At the opposite extreme are those faring that completely dismantle the old structure and physically distribute all land and assets to individuals. The large- scale farm is broken up into small family units, each' with its allotment of land and assets (the latter possibly in a cash-equivalent form). A few hundred private farms- are thus created in place of one large collective farm. The sense of private ownership and responsibility is thrust upon

14 j these families, and in order to survive on their own they must inevitably adjust their mode of behavior toward business‘orientation and profit motivation in a compact family-based unit. To work effectively, however, these private farms need a functioning market environment, with orderly input supply and product marketing channels, and with reasonable access to credit facilities. Unfortunately, such an environment still does not exist in most former socialist countries. Unavailability or inaccessibility of normal market functions may be an obstacle to the success of private farmer, blocking broad acceptance of this reorganization strategy.

Figure 1. Alternative Farm-Restructuring Modes.

Intermediate Structures. A number of farm structures intermediate between the old collective and the new family farm have appeared. In a bottom-up approach, private farmers created through the dismantling of a collective combine to form an association of agricultural producers. This process is demonstrated in Figure 1 by the transition from the collection of independent private farmers at top right to the association structure at bottom right. In some associations, each farm retains its identity, but all farms cooperate in provision of services, where economies of size and the effect of pooling of resources are most pronounced. Cooperative support may include sharing of input supply, product marketing, agricultural machinery, mechanical maintenance, credit, transportation, and possibly even professional

15 -

services,,such as accounting, management consulting, and extension. In the Western paradigm, this is an association of private producers supported by service cooperatives. _ In other associations, private farmers may pool their small plots into 'larger allotments and form a partnership for production. Several partnerships or associations in the same region may in turn join to form service cooperatives.

Restructuring Modes for Collective and State Farms

o Reconstitution of a collective structure based on individual ownership of land and asset shares o Transformation of the collective structure into a joint-stock corporation based on individual shares o Division of the collective structure into autonomous profit-oriented entities based on individual investment of land and asset shares and operating within an association or a service cooperative o Separation of independent family farms, partnerships, or production cooperatives from the collective structure

In a top-down approach, a similar associative structure evolves in an opposite direction, when the old collective, instead of totally dismantling into many private farms, reorganizes internally into a system of relatively small autonomous profit centers. This process initially produces the structure shown schematically at bottom left in Figure 1. The land and asset base of each unit is the sum total of the land and asset shares of its members or "active investors." Because of the relatively small size of such. units, which are organized as partnerships, cooperatives, or small corporations, the active .workers maintain the -sense of private ownership of production assets. The old management structures of the collective may in turn reorganize to provide the necessary services and support to these autonomous units. Agricultural production is thus concentrated in units that are small enough to mait4airi.*.a good sense of personal involvement and accountability, ': while farm support services and the interface with the environment are provided by a relatively large and professionally experienced cooperative structure. This organizational form has the important advantageof providing a natural solution to the needs of pensioners or other shareholders who do not wish to continue farming. Each production unit, in addition to its active member-owners, may accept land and asset shares from inactive investors, who will be entitled to dividends from the unit's profits. In order to attract land and capital assets from inactive investors, the production units will have to compete among themselves by improving their. efficiency .and increasing- profits. • With time, as the constituent.units gain experience, they may become more independent of the former management, whose role is gradually reduced to that of a 'service cooperative that member units use as needed. This evolution toward more independent subdivisions and a more service-oriented "core'is the essenCe of the top-down transition to the associative structure at the bottom right of Figure 1. The difference between the two structures depicted at the bottom of Figure .1 is effectively in the degree' of independence of the member units and the balance between managerial and service functions of the former center. •

16 In these intermediate farm structures, shareholders and members have a._stronger sense of property rights than in the cosmetically restructured but fundamentally unchanged.collectives. In most existing intermediate forms, however, land is pooled, either in, management .or ownership, and the farms retain collective production, in addition to cooperative provision of .11 services. In this respect they.differ from Western farmer cooperatives .or .Israeli moshavim, where production is private and cooperation is restricted to shared services.(Zusman 1988). Current intermediate forms in the former Soviet Union and .other socialist countries have a greater potential for organizational instability than true corporations, as members usually retain the right to leave the organization.taking their share of land and assets with them. This, however, is a feature of all voluntary cooperatives, which on the one hand do not block exit and on the other do not require members to find anew shareholder to take over their share, as is the standard practice in Corporate forms of organization.

New Cooperatives: Implementation Across the Region ; . : •. Different countries in the region pursue different farm restructuring strategies. The dismantling approach has been adopted in Albania, Romania, and. Armenia. In these three countries, all collective farms were rapidly disbanded and divided into'very' small private farms during 1991. In other countries; dismantling is a rare phenomenon. in .RUsi.a, among 21,000 farm enterprises that reorganized by January 1993, only 268 broke pp completely into private farms. Since division of land and asSets. into Shares is a first step toward internal restructuring; it is significant that 63% of Russian farm enterprises responding to a December 1992 survey had divided their land into,shares, and a similar proportion of farms had also divided their non-land asset's into shares (Brooks and Lerman 1994b). In Ukraine, half .the firms participating in a winter 1993 survey had distributed asset Shares and one-third had distributed land shares to their members and pensioners (Lerman et -al: 1994a). Distribution of land and asset shares to - individuals may eventually be. followed by deeper internal reStructuririg. . In general, individuals do not show a particular willingness to. leave the collective organization, despite their newly found ownership of land and assets. In recent surveys, 85% of collective'farm members in Russia and 78%. in Ukraine indicated that they did not. intend to leave the collective and become a private farmer (Brooks and Lerman I994b; Lerman et al. -1994a). Approximately 80% of farm enterprise employees surveyed in Russia intended to assign their land and asset shares for collective production to the farms on which they are employed. This attitude is not restricted to the former Soviet Union: half the recipients of land through restitution in Bulgaria and a significant proportion in Hungary have also chosen to remain in agricultural production cooperatives, while in Romania, where collectives were forcibly dismantled, fully 48% of land originally 'distributed to private 'farms is now in various informal farmers' associations (Csaki and Lerman 1994). Members of former collective farms are thus. voting with their feet" for perpetuation of the cooperative framework,.at least in the immediate future, probably because of the sense Of security it affords to individuals in a highly uncertain and '- rapidly changing environment. The expectation of greater security in a cooperative is not • unjustified: survey data for Russia and Ukraine indicate ,that, despite the,need for reducing costs and a decrease of about 15% in the land. base of the farms due to various redistribution schemes, the labor force remained virtually unchanged since 1591 and farm Managers continue to insist that they would borrow to meet the payroll rather than dismiss their. member-workers (Brooks

17 and Lerman 1994b; Lerman et al. 1994a). The tradition of social security and the cooperative ethic are apparently at work here, and efficiency'improvement will have to be sought through means Other than simple shedding of excess labor. •

Table 9. Restructuring of Farm Enterprises in Russia and Ukraine

. 1 Ukraine, % Russia, %

• ••

••• 1.1994* . 1.1993 1.1990

Not reorganized 28 22 8 Reorganized 72 78 92 Keeping old form with new charter 9 . '27 6 Collective enterprises and limited-liability partnerships 55 32 46 Join-stock societies 2 • 9 .; 31- Agricultural production cooperatives 2 • - 6 - " 3 Associations of peasant farms 2 3 1 Other forms - 2 1 5

Source: * Lerman et al. (1994a); + Brooks and Lerman (1994b); # based on a 1994 World Bank survey (forthcoming).

• The extreme form Of retention of the collective framework, the "say as is" approach, has been popular in the initial stages of reform in Russia and other former .Soviet republics, where it is referred to as ":changing .the -sign on the door.." Today'the number Of farms that choose to keep their old form during reorganization is relatively Small (Table 9); but most farms. reorganize as whole entities,. registering is collective and cooperative enterprises or paitnerships. The main distinction .between the new. collectives and their predeCesofs is that upon registry as a new collective land passes from state ownership to collective dWi'leiship;'laying the ground for distribution of 'shares to members • _ The reorganization into smaller autonijiiimig subdivisions and profit Centers Within. a collective (the structure at bottom right in Figure 1) is observed, in various stages and with varying frequency, in Russia, Ukraine, Belarus,.and in many other farmer Soviet .republics.It constitutes -a natural extension of the old system of "lease cooperatives"-;:Which Was instituted by Gorbachev back in the 1980s, but did not, achieve the'expected results because propertyrights did not change and the administrative* apparatus of *Central planning 'ffo.iii'outside the farm remained intact. • : Restructuring Into autonomous. profit • centers'. was also the preferred - mode of reorganization chosen by five Russian farms in Nizhnii Novgorod Province that participated in a farm restructuring 'pilot project .conducted in 1993-1994s by the World Bank's International' Finance Corporation(IFC) with financing from U.S*.1- AID and subsequently the UK. Know-How Fund. The kages of, the restructuring proCedure. implemented on these farms arellited in a box.. The results achieved in the Nizh#ii Novgorod .pilot project basically correspond to the associative structures shown at the bottom of Figure 1:- an. existing collectivefarm is reorganized into a number of agricultural and non-agricultural activities'owned by voluntarily constituted

18 groups of former members, which register as legal entities and continue to exist in a federated cooperative structure provided by the former management. ,

A Model of Farm Restructuring: The Nizhnii Novgorod Experience

Preparatory Work o Inventory of land and assets o Preparation of eligibility lists o Calculation of land and asset shares Approval of distribution plan by General Assembly

Stage 1: Distribution of Shares o Distribution of share certificates to eligible individuals o Acquainting shareholders with their rights and options

Stage 2: Creating New Enterprises O Identification of technologically independent subdivisions of existing farm O Regrouping of shareholders through. negotiation, • registration of enterprises - .-- • .- • . Concluding contracts between shareholders joining the • • various enterprises •

Stage 3: Auctions O Division of land and assets into lots O Submission of bids for land and asset lots O 'Physical distribution of land and assets through an Auction

Stage 4: Transfer of Property Rights O Physical transfer of land and assets O Issuance of title

The:Russian government adopted a detailed resolution- in February -1995 intended to endorse the Nizhnii Novgorod model and facilitate its replication in other parts Of Russia. • Meanwhile the IFC has dramatically stepped up its restructuring ,work in Nizhnii,.Novgorod Province (the number of restructured farms increased from 6 in 1994 .to 53 in.:1995),. and also • branched out to a number of other provinces. A particularly interesting restructuring project-has..„ been completed recently by IFC in Rostov Province, where a large.20,000;.ha farm was divided in:a Closed auction into 10 agricultural enterprises and a 'construction enterprise,. all of which then jointly established..a marketing and ..processing cooperatiye. The :member enterprises contributed from -15% to 1% in the equity •capital of the.cooperative, - based on their expected • patronage.. Table 10 summarizes the basic results of the Rostov:farm-restructuring project It is notable that of some 1000 shareholders only 60% actually work in the new enterprises and the:5 cooperative: the rest are "passive iinvestors", mostly pensioners and also individuals already employed outside agriculture.

19 Table 10. IFC Rostov Province Farm Restructuring Project: Post-Reorganization Profile

Enter- Specialization Land Asset Employees Land, Share in prise shares shares ha cooperative

1 dairy, feedlot, grain 215 203 96 -- - 2983 16% 2 dairy, feedlot, grain 230 217 150 4224 16% 3 dairy, feedlot, grain 280 207 130 6071 18% 4 dairy, feedlot, grain 132: . ' 122. 34 2227 15% 5 grain, feed , • 61 • 50 13 1062 6% . - 6 livestock _... 77 30 .... 4% 7 grain, feed 64 . • 66 . 20, 1644 4% 8 grain,'feed . 97 • • 55 •-• 17 1208 4% 9 grain, 'feed • 28 34 8 569 2% 10 bees -- 1 1 -- 1% 11 construction19• - 25 1% 12 marketing/processing coop 14 84 13%*

Total 1107 1065 • 608 19988 100%

* Share capital invested by associate members who did not invest in any of the 11 enterprises. Source: IFC Operational Report March 1 - April 30, 1995.

The model of division of large-scale farms into smaller profit-motivated functional units supported by cooperative services appears to provide a fairly faithful generalization of the diversity of reorganization modes which are occurring in the., agricultural sector all over the- region. The fledgling private farm sector, which basically represents .the extreme form of division to the stage of total separation from the large-scale farm, is also beginning to develop some cooperative structures. Private farmers are beginning to realize that totally independent individual farming is very difficult, especially in the present economic environment. They are beginning to share machinery and .equipment; to cooperate in purchasing of supplies and marketing of products, to pool their,land resources in order to achieve more efficient cultivation, and even to establish joint "industrial" enterprises.to augment their income from agriculture. Independent private farmers face a number of obstacles in the current environment. Private farmers need credit to satisfy their requirements for working capital and long-term • investments; they also need trade channels both for purchasing farm inputs and for marketing their products. In 1992-1993 surveys.of members and employees of collective and.state farms in Russia and Ukraine, over two-birds cite insufficiency of capital and difficulties in obtaining machinery and farm inputs as.the main reasons for ,their decision not to become private farmers (Table 11). The existing credit and banking system, which traditionally functioned as a window. for transfer .of _funds from the budget: to large collective and state farms, is not designed to finance independent farming operations, and the new commercial banks show little interest in agricultural lending". The state supply'ilfonopolies have been replaced with "privatized" monopolies, but a network of rural.oUtIets for selling inputs. and implements to private farmers has not yet developed.

- 20 Table 11. "Do You Intend to Become a Private Farmer?" (percent.of respondents in each category)* • _ - • , - Reasons given by those answering "NO" Reasons given by those answering "YES" , Russia Ukraine Russia Ukraine

Lower earnings • 11 30 Higher earnings 58 81 Less secure earnings 16 48 Independence 51 - 66 - Too risky 41 72 Children's future • 64 86 . Don't want change - • - 31 58 Creativity, initiative 29 61 Insufficient capital 62 71 Higher status 18 54 Difficulty obtaining machinery 65 84 Forced by liquidation 10' 24 and farm inputs of old farm . Insufficient skills 17 43 , .:`-• ' Insufficient legal guarantees 36 65 . .. Loss of social benefits - 18 46 , Restrictions on buy/sell of land 12 - 34 - • -- . • * The proportion of respondents reporting they did not intend to become.a private farmer was 85% in Russia and 78% in Ukraine. Source: Russia as of Jan. 1993 from Brooks and Lerman (1994b); Ukraine as of Jan. 1994 from Lerman et al. (1994a).

Private farmers in all countries in the region are still highly. !dependent on state marketing:channels and state-owned processors for selling their farm products: The dependence On state marketing Organizations is particularly pronounced for meat, milk, and grain, where over hall the producers sell mainly through state channels'(Table 12) ,Even. Poland, With its traditionally strong private agriculture,. and Romania, Wheie,the :.collective, sector has been. dismantled, are not excepOon,1.to. this pattern Despite high'dependence .on _state #14rketing. organizations, private farmers do not:reriort-serioUs'.difficulties with marketing their products, : other than the standard Complaint that prices received are ,totilow.. • While private marketing channels iiedeVeioping and steadily growing in importance,. there is still no system for farm-level purchase .or Wholesale of agricultural products, and the available auctions, exchanges',—and • fain-id& • markets are insufficient to. handle the full . commercial volume of agricultural products. The:transportation systetkis inadequate. Technical services and equipment are hardly available for private -farmers. Former collective and state farm workers have a very limited knowledge of business operations, financing,.accoun#ng, taxation, • and risk management. • - • • • • Recognizing.these. difficulties, the government in Russia and Ukraine, for .instance, encouraged and actively sponsored the establishment hi 1991 Of 'a national.. association of private farmers and cooperatives (known as AICKOR in Russia). The national association rapidly proceeded to establish -a network of local associations at the province and district level. In other former Soviet republics (Uzbekistan, for iinstance), the local farmers' associations are established without a national umbrella *organization and are closely linked With,.local .gOveintnent. It. is hard to characterize these associations*as cooperative unions, atil.yet.one of the functions of AMCOR in Russia (in addition to acting as a conduit fOr..1Overnment'ciedit to private farmers) was to establish "trading firths"lolacilitate input purchases by member farms. Recently, AMCOR has

2]. . • begun.to expand its constituency by allowing membership of "deeply restructured" collectives in addition to .private farrris.. This is a radical departure from its original declared -policy of - serving the private farmer, but it will probably produce 'benefits to the entire agricultural sector in terms of improved competitiveness in purchasing and marketing.

•••• • _ •••,• Table 12. Private Farmers Reporting Sales Mainly Through State Channels (percent of resiiondents) - :-, Russia Ukraine• Albania Bulgaria Hungary Poland Romania Meat 67 58 6 57 58 45 52 Dairy products 51 . .26 94 78 65 .78 • - 69 . Grain 92 91 55 54 53 67 79 Potatoes 58 65 19 8 11 23 22 Vegetables 24 51 4 3 19 27 0 Fruit 29 10 12 49 14 47 9

Source: Russia as of Jan. 1993 from Brooks and Lerman (1990); Ukraine as of Jan.. 1994 from Lerman et al. (1994a); Easterii/Central European Countries based on 1992-1993 World Bank surveys (Euroconsult • 1995).

The deficiencies of existing infrastructure can be overcome not only by central cooperative unions,. such as AICKOR, but perhaps. even more effectively by grassroots cooperation *among private *farmers in rural communities. To be effective, local cooperation must encompass .as a minimum the. critical areas of finance,.marketing, and technical _services. World Bank surveys'conducted in 1_992-1994 have shown that around 80% of both Russian and Ukrainian private farmers participite.in some form of joint activity in provision.or.use;offarm services (Brooks and Lerman 1994b; Lerman et al. 1994a). The main areas of cooperation with - other fanners are production, Marketing, input supply, use of machinery, and provision or receipt of credit, Where the participation rates are 30%-40% of respondents in Russia_ and only slightly lower in Ukraine (Table 13). Cooperative processing is still: undeveloped,:but the observations for two .successive years in Russia seem to indicate that this cooperation is • increasing. More. than half the iirivate. farmers in the surveys cooperate in their Use of consulting- • services, although this. is not a.major input at the present time. . . .• •. In addition .to direct responses highlighting the significance of machinery pools for farmers in Russia and Ukraine, an. indixectIudicat.ion_of joint use and ownership of Machinery. and equipment is provided by. farmers Who *report owning a fraction of a machine•-(0.6. of a -- tractor or 0.3 of a truck). The frequency of such "joint owners" among the surveyed farmers in Russia is not very high, but it is not negligible either (Table 14).• . • . • -• • In another survey conducted in Central and Eastern Europe in 1992-1993 (Eurcic-Onsult 1995), 45% of Romanian private farmers; 30% of Bulgarian farmers, and 15% of Hungarian farmers indicated that they participated in cooperative activities In Poland, where cooperative farms hardly exist and the tradition of private .farming ,is. solidly- established,.25% of Private • farmers participating in the survey indicated that,they cooperated in production with-idtheir.priVate • farmers, over 15% reported cooperation in Marketing and -input supply,- over 30%'COOpelation. in transportation, and as many as.60% cooperation in credit. New forms of cooperation •

22 compensate in part for the absence of crucial markets in products and services. As markets become more developed, the ways in which farmers cooperate are likely to evolve as- well..

. Table 13. Cooperation Among,Private Farmers (percent of respondents)

• • Activity Russia Ukraine

1992* .1994*. 1994+

• • . , . Consulting 55 58 64 - Marketing .,...... , 33 . .33 . , .•.4 • , Input supply., .. 37 .30 • •. '20 : .Machinery pool . • • 45. ' Mutual credit .- 35 - •37 - 16 Joint production • • .31 '' • 27* 34 . ..,. Processing • '1" .: . 8 • , 6 Membership in national/local Peasants! Association . .85 . 77 . 80 ... "Some form" of cooperation . _78 . . 74 . 82

Source: * Brooks and Lerman (1994b); lc* !• )ased pn a.1994 World Bank survey.(forthcoming).;

+ Lerman et at. (1994a). ,

•• • • .*„.•

Table 14 Russian Farmers, Owning Less than a,Whole Machine" , Machine Percent out of allfarmers with Range.offractional. machines in this category ownership.;

••• Tractors 3.5 • Trucks 4.5.. 0• 3-0 ., •5 Plows ... 4.0 • 0.370,8; . Seeders - • 5.0 •

HarVesters -. .8.6 • .. Grain combines • 9.1 0370.5

• Other machinery 5.6 .0.• „ .

Source: based on a 1994 World Bank Survey in Russia (forthcoming •

23 Legal Framework for New Cooperatives

The emergence. of a new style of cooperation in the former Soviet Union, as well as in Eastern and Central_ Europe, thus appears to be an empirically established fact. However, the legal framework for cooperation is still largely missing. Among the former Soviet republics, only the' tiny Moldova has anew Law on Cooperation (passed in January 1992), while the Russian parliament, always deeply divided on agrarian issues, has been debating a draft law of agricultural cooperatives since. 1992, and the debate will probably continue without reaching agreement for some time to come. . . • . In the absence of a new law of cooperatives, Russian cooperatives are governed today by the October 1994 Civil Code, which devotes a whole paragraph (six articles) to ."production" cooperatives: The Russian Civil Code defines a production cooperative (an artel). in .an. entirely conventional way as a "voluntary association of citizens based on membership for the purpose of joint production or other joint business activity (production, processing, and marketing of industrial, agricultural, or other products, performance of work, trade, provision.Of cOnsumer and other services) using their own personal labor and other participation and pooling of asset shares by the. members (participants)." It is clear that the definition applies both to production and service cooperatives, although the latter are not mentioned under this explicit term. The Civil Code.naturally recognizes the general assembly of members as the supreme management organ of cooperatives and acknowledges the constitutional role of the charter. in settling of all cooperative matters..Significantly,. the Civil Code recognizes the member's right of free exit from a cooperative, and stipulates that the departing member will receive the value of his share in cash or will be allowed to take with him the physical assets corresponding to his share. The Russian Civil Code limits membership in a cooperative to individuals ("citizens"). The proposed draft law of agricultural cooperation retains this restriction for production cooperatives (i.e:;--coOpetatives based on individual labor, which in addition to production may also engage in sales and 'oilier legal activities), and expands the range of *cooperative organizations to include, Various 'service cooperatives which may be created as second order cooperatives not only by .citizens but also by other cooperatives (or legal entities in general). In the Moldovan law -production cooperatives are.: also defined broadly to include service cooperatives, but membership in all cooperatives. is restricted to individuals: legal entities are specifically excluded from membership in a cooperative. Second-order cooperatives may be created in the form of unions and associations of cooperatives, and cooperative's are also allowed to establish other (non cooperative) enterprises, but the restriction to members' own labor is a serious obstacle to establishment of service cooperatives. The other former'Soviet republics, in the absence of their own cooperative legislation, are bound by the 1988 USSR La* on •Coiiiiiiatfon as amended. The old Soviet taw. is deeply flawed and clearly inadequate. for..the present:situation.. The lack of.clear legal guidelines is an obstacle not only to the development of cooperation, but to the entire transformation of agriculture, which as we have demonstrated incorporates cooperatives as one of its foundation blocks. In Eastern Europe, Hungary has recently passed an updated law of cooperatives and augmented it with very detailed transition legislation intended to streamline and accelerate the transformation of Hungarian agriculture to a market-oriented system. The former Soviet republics urgently need similar comprehensive legislation.

, 24 Conclusion

The transition of the former Soviet .agriculture a market. . economy leads quite naturally to the creation of several kinds of cooperatives. Uiilike the former collective farm's, these are true cooperatives in the Sense that they are Created voluntarily, ensure free exit of the members, and are governed by a democratic . process relatively free from government intervention in operating decisions. The emergent organizational *forms cover a range of alternative structures: from new production. cooperatives that are created by .reorganization of collective farms into smaller units based on private:ownership, through voluntary'associations of independent farmers seeking Safety in cooperation, to service .cooperatives established by various. local producers. • . . . We may be witnessing a confluence of two. streams in former Soviet agriculture: large- scale farms split into smaller units supported by cooperative structures, while Small-scale individual farmers go through a process of cooperativization creating functionally similar support structures. This suggests that Western-type service cooperatives will play an important role in the future of the farming sector in the region. In the cooperative paradigm, the reorganized agricultural system that Would emerge from the former large-scale farms can be viewed as an extension and a Modification of the Israeli moshav model.. Private agricultural production, based both on family farms and on larger multifamily enterprises, will, be supported by a .range 9f service cooperatives whose function will. be to correct for ..market .failure and to exploit economies of size. New private service cooperatives can be .based on the .Core of the existing cooperative farmS. Farmers should be -free, however;. to choose the forms of cooperation they prefer, and the new cooperation must be based on private ownership and competition. In The present environment of'high uncertainty and InadeqUge market structures, peasants do not rush to take advantage of their new freedom of exit and lately .prefer to. remain in feorghnizing production cooperatives. Regional service •.'cooperatives * may -provide the necessary reinforcement and backing to the emerginep'tivale` .sector in the former • socialist countries by imbuing the new farmers with a sense Of•Colle6ffiie **oh and shielding them to a certain extent from market imperfections. The'establishment .olsiriiiCe'Cooperatives should not rule out the establishment of private firms in the same lines Of business. Competition between the two forms of organization would only imkOVe the economic efficiency of the system by providing the producers with a 'greater .variety Of Options. *.. • • •

• _

• • 't

• ;••• •

•••

25 REFERENCES

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27 PREVIOUS WORKING PAPERS

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