Economic growth with equity : Ukrainian perspectives

WORLD BANK DISCUSSION PAPER NO. 407 WDP407 Work in progress for public discussion October 1999 Economic Growth with Equity Jh0/111 1II)lsIc and V i) A'(l Xi17Nh( (('(i1m:,S)  Recent World Bank Discussion Papers No. 338 Cost Sharing in the Social Sectors of Sub-Saharan Africa: Impact on7 the Poor. Arvil Van Adams and Teresa Hartnett No. 339 Public and Private Roles in Health: Thleory and Finanicinzg Patterns. Philip Musgrove No. 340 Developing the Nonfarm Sector in Bangladesh: Lessons from Other Asian Countries. Shahid Yusuf and Praveen Kumar No. 341 Beyond Privatization: The Second Wave of Telecommnunications Reforms in MeXlico. Bjorn iVVellenius and Gregory Staple No. 342 Econotnic Integration and Trade Liberalization in Southlerni Africa: Is I'here a RoleJbr South Africa? Merle Holden No. 343 Financing Private Infrastructu.re in Developing Counltries. 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Sacay (Continued on7 the inside back cover)  World Bank Discussion Paper No. 407 Economic Growth with Equity: Ukrainian Perspectives John Hansen, Anatoli Halchvnsky, Vira Nanivska, Vasyl Rohovyi, and Ihor Shumylo (Editorial Board)  Copyright (D 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in Ukraine First printing October 1999 Discussion papers present results of country analysis that are circulated to encourage discussion and comment within the development community. The typescript of this paper has not therefore been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. Tahe material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the intemal or personal use of specific clients, or for educational classroom use, is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422. ISBN: 0-8213-4404-8 ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data has been applied for.  CONTENTS ACKNOWLEDGMENTS ........................................................................ VII ABSTRACT ...... .................................................................. IX ACRONYMS, ABBREVIATIONS AND CURRENCY UNITS ..................................................................... XI BUILDING CONSENSUS FOR REFORMS: THE PARTICIPATORY PROCESS ................................ XIII 1. AGRARIAN POLICY ........................................................................ 1 2. POLICY IN EDUCATION ........................................................................ 21 3. ENERGY POLICY ........................................................................ 37 4. FISCAL POLICY ........................................................................ 61 5. HEALTH CARE POLICY ........................................................................ 87 6. INDUSTRIAL AND FOREIGN TRADE POLICY ........................................................................ 101 7. SHADOW ECONOMY POLICY ........................................................................ 123 8. SOCIAL PROTECTION POLICIES ........................................................................ 141 ANNEX A: LIST OF UKRAINIAN CEM PROJECT CONTRIBUTORS ................................................. 127 TEXT GRAPHS CHAPFER I GRAPH 1. LAND-USE. IN THOUSAND HECTARES ........................................................................ 5 GRAPH 2. OUTPUT OF PLANT-GROWING. AT 1996 PRICES, BILLION UAH ............................................................... 7 GRAPH 3. OUTPUT OF THE LIVESTOCK SECTOR PER YEAR, BILLION UAH ................................................................ 7 GRAPH 4. THE ABSOLUTE LEVEL OF LOSSES OF ENTERPRISES OF THE PUBLIC SECTOR. MILLION UAH .....................9 GRAPH 5. NUMBER OF LOSS-MAKING ENTERPRISES IN TIHE PUBLIC SECTOR ............................................................. 9 CHAPTER 3 GRAPH 1. VOLUME AND STRUCTURE OF ELECTRICITY PRODUCTION, BILLION KW-HOURS ...................... .............. 41 CHAPTER 4 GRAPH I. LEVEL OF MUTUAL INDEBTEDNESS, 1992= 100 ........................................................................ 66 GRAPH 2. SHARE OF WORKING CAPITAL, % ........................................................................ 67 GRAPH 3. EXECUTION OF THE STATE BUDGET AND LOCAL BUDGETS .................................................................... 68 GRAPH 4. CHANGES IN GDP AND INDUSTRIAL OUTPUT, % ........................................................................ 69 GRAPH 5. REAL EXPENDITURE AND GDP, 1992= 1 00 ........................................................................ 69 GRAPH 6. BUDGET ARREARS, THOUSAND UAHi ........................................................................ 70 GRAPH 7. SHARE OF BIIDGET ARRFARS IN BUDGET REVENUES ........................................................................ 70 GRAPH 8. STRUCTURE OF ARREARS BY TAX, 1995-1998 ........................................................................ 71 GRAPH 9. BUDGET DEFICIT AS A SHARE OF GDP, % ........................................................................ 73 GRAPH 10. STRUCTURE OF FINANCING OF THE BUDGET DEFICIT ........................................................................ 74 iii  CHAPTER 6 GRAPH 1. DYNAMICS OF GROSS OUTPUT OF INDUSTRIAL PRODUCTION ................................................................. 104 GRAPH 2. DYNAMICS OF GROSS VALUE ADDED OF INDUSTRIAL PRODUCTION ....................................................... 104 GRAPH 3. CIHANGES IN THE SECTOR-BY-SECTOR STRUCTURE OF INDUSTRIAL PRODUCTION, 1990-1998 __ .......... 104 GRAPH 4. CHANGES IN THE STRUCTURE OF MATERIAL PRODUCTION, 1990-9 .................. ..................................... 104 GRAPII 5. THE SHARE OF CONSUMER GOODS IN THE OVERALL VOLUME OF INDUSTRIAL PRODUCTION AND 1THEIR STRUCTURE (BY SECTOR) ................................................................................ 105 GRAPH 6. FIXED ASSET DEPRECIATION ............................................................................... 105 GRAPH 7. CHANGES IN THE VOLUME OF INDUSTRIAL OUTPUT AND EXPORT. % 1994= 100 .......... ......................... 106 GRAPH 8. COMMODITY STRUCTURE OF INDUSTRIAL EXPORTS AND IMPORTS .................... .................................... 106 GRAPH 9. SECTOR-BY-SECTOR STRULJCTUIRE OF EXPORTS .....................0...............6.................... ....6........ ... 106 GRAPH 1 0. CHiANGES IN THE STRUCTURE OF SSEs FORMS OF OWNERSHIP BY NUMBER OF ENTERPRISES ............. 107 GRAPI I 1. DYNAMICS OF PRICE INDICES (AVERAGE MONTHLY INFLATION) ...................... ................................... 108 GRAPH 12. THE RATE OF 'BARTERIZATION" IN SECTORS OF INDUSTRY IN 1998 ................. ................................... 108 GRAPH 13. SIRUCIURE OF FORMS OFOWNERSHiP ...............................................................................1 112 CHAPTER 8 GRAPH 1. STRUCTURE OF PENSION RECIPIENTS ACCORDING TO TYPES OF PENSIONS .............. ............................... 145 GRAPH 2. STRUCTURE OF OLD AGE PENSION RECIPIENTS AC'CORDING ID OI HE T1MLk IHE PENSIONS ARE GRANTED (IN RETIREMENT AGE AND BEFORE RETIREMENI AGE) ...................................................................... I .... 146 TEXT TABLES CHAITI'ER 1 TABLE 1. PER CAPITA CONSUMPTION OF THE MAIN FOODSTUFFS, IN KILOGRAM ...................................4...................4 TABLE 2. PROFITABILITY (IN PERCENT) OF AGRICULTURAL PRODUCTS IN THE PUBLIC SECTOR OF THE AIC .............5 TABLE 3. GROSS AGRICUL'I'URAL OUTPUT (BY CAEGORY; AT 1996 PRICES; MLN LUAH) .........................................6 TABLE 4. LIVESTOCK (AS AT YEAR END; THOUSAND HEADS) ................................................................................ 7 TABLE 5. AREA UNDER CROPS (AT FARMS OF ALL CATEGORIES: MLN. HA) ...........8....... ......................................8 TABLE 6. PROFITABILITY OF PRODUCTION IN PROCESSING SECTORS (%) . ..................................................9..............9 TABLE 7. TFIE ISSUES WITH THE LOWEST DEGREE OF AGREEMENT (THE HIGHEST LEVEL OF DISPERSION IN RESPONSES) . ............................................................................... 18 TABLE 8. CONSENSUS ON THE MAIN STRATEGIES ...............................................................1 , 8 CHAPTER 2 TABLE I. PERMANENT PRE-SCHOOL EDUCATIONAL ESTABLISHMENTS (END OF YEAR) ........................................... 25 TABLE 2. DAY SECONDARY EDUCATIONAL ESTABLISHMENTS (AS AT THE BEGINNING OF THE SCHOOL YEAR) ........ 26 TABLE 3. VOCATIONAL EDUCATIONAL ESTABLISHMENTS (AS OF THE BEGINNING OF A SCHOOL YEAR) ........ .......... 28 TARB F 4. H IGHFR EDU CATIONAL ESTABLISHMENTS (AS OF THE BEGINNING OF A SCHOOL YEAR) ........................... 28 TABLE 5. CURRENT BUDGET EXPENDITURE ON EDUCATION ................................................................................. 30 CHAPTER 3 TABLE 1. OIL-PROCESSING BY UJKRAINIAN OIL PROCESSING PLANTS, MILLION TONS ...... ........ ............................. 40 TIABLE 2. DEGREE OF ENERGY SELF-SUFFICIENCY. % . ................................................................................. 42 TABLE 3. PRODUCTION CHARACTERISTICS OF OPPS, MILLION TONS ...................................................................... 47 TABLE 4. THE ISSUES WITH THE LOWEST DEGREE OF AGREEMENT (THE HIGHEST LEVEL OF DISPERSION IN RESPONSES) .5..................................... 57 iv  TABLE 5. POSITIVE RESPONSES ..........58........................................... . ....................... CHAPTER 4 TABLE 1. TAX SHARING: DEDUCTIONS TO THE STATE BUDGET .................................................................... ......... 75 TABLE 2. SOURCES FOR DBT IN VARIOUS COUNTRIES .............................................................................. 76 TABLE 3. TRANSFERS FROM THE STATE BUDGET, BILLION .............................................................................. 76 TABLE 4. METHODS FOR DISTRIBUTION OF BUDGET GRANTS .............................................................................. 80 TABLE5. ISSIJES ON WHICH THE AGREEMENT WAS AT A LOW LEVEL (AS EVTDENCED BY A HIGH LEVEL OF DISPERSION IN RESPONSES) .............................................................................. 83 TABLE 6. POSITIVE RESPONSES ............................................................................... 84 CHAPTER 5 TABLE 1. LIFE EXPECTANCY RATE .............................................................................. 89 TABLE 2. MORTALITY RATES IN UKRAINE AND EUROPE .............................................................................. 90 TABLE 3. SICKNESS RATE BY MAJOR DISEASES (NUMBER OF FIRST REGISTERED CASES) ........................................ 91 TABLE 4. NETWORK OF MEDICAL INSTITUTIONS (AT THE END OF THE YEAR STATED) ............................................ 92 TABLE 5. THE NUMBER OF DOCTORS AND NURSES (AT THE END OF THE YEAR) ...................................................... 92 TABLE 6. CURRENT BUDGET EXPENDITURES FOR HEALTH CARE IN UKRAINE ......................................................... 94 CHAPTER 6 TABLE 1. PROVISION OF SELECTED ECONOMIES WITH PRODUCTIVE FACTORS AND EFFICIENCY OF THEIR USE ...... 111 TABLE 2. THE ISSUES WITH THE LOWEST DEGREE OF AGREEMENT ....................................................................... 118 TABLE 3. THE ISSUES WITH THE HIGHEST DEGREE OF AGREEMENT .......................................... ............................ 119 C(HAPTER 7 TABLE 1. MAJOR TYPES OF SHADOW ECONOMIC ACTIVITY CHARACTERISTIC OF THE SOCIALIST AND CURRENT STAGE ............................................................................... 128 TABLE 2. INDICES OF "SHADOWIZATION" OF UKRAINE'S ECONOMY BETWEEN 1992-1997 .................................. 129 CHAPTER 8 TABLE 1. NUMBER OF PENSIONERS AS OF JANUARY 1 .............................................................................. 145 TABLE 2. DEMOGRAPHICS OF WORKING AND NON-WORKING AGE POPULATION ................................................... 146 TABLE 3. PROPORTIONS OF PENSIONERS WORKING IN VARIOUS SECTORS (1997) ................................................. 146 TABLE 4. REPLACEMENT RATES - AVERAGE PENSIONS THAT ARE GRANTED ACCORDING TO THE LAW OF UKRAINE "ON PROVISION OF PENSION" AND AVERAGE SALARIES OF WORKERS IN EMPLOYMENT ........ ........... 147 TABLE 5. DISTRIBUTION OF PENSIONERS WHO ARE REGISTERED IN THE SOCIAL PROTECTION AGENCY AS OF JANUARY 1, 1998 ACCORDING lO THE AMOUNr OF PENSIONS ......................................................................... 148 TABLE 6. NUMBER OF WORKERS EMPLOYED (THOUSANDS) .............................................................................. 149 TABLE 7. NUMBER OF UNEMPLOYED PEOPLE AND UNEMPLOYMENT RATES BY THE END OF A GIVEN YEAR... ....... 149 TABLE S. STRUCTURE OF YOUTH IN COMPARISON WITH THE TOTAL NUMBER OF UNEMPLOYED PEOPLE ............... 150 TABLE 9. FEMALE UNEMPLOYMENT IN THE GENERAL UNEMPLOYMENT STRUCTURE ............................................ 150 TABLE 10. BURDEN ON THE WORKING UKRAINIAN POPULATION, (PER I000 PEOPLE) ............................ ............ 152 TABLE 11. PATTERN OF REDISTRIBUTION OF FUNDS BETWEEN SOLIDARITY AND ACCUMULATIVE SYSTEMS OF PENSION SUPPORT .............................................................................. 154 TABLE 12. ISSUES AGREED TO THE LEAST DEGREE (THE HIGHEST LEVEL OF DISPERSION) .................................... 161 TABLE 13. AFF I RMATIVE AN SWERS .............................................................................. 162 v  TEXT BOXES CHAPTER I Box 1. SOME RESULTS OF 1998 ...................................................................... 4 Box 2. DEFINITION OF AGRICULTURAL PRODUCERS .......................................................................5 Box 3. THE STATE OF "DE-NATIONALIZATION ....................................................................... 6 CHAP'I'ER 3 BOX 1. OUTLOOKS FOR THE WORLD NUCLEAR POWER SECTOR ..................................................................... . 42 Box 2. THE POWER SECTOR REQUIRES SIGNIFICANT INVESTMENT ...................................................................... 43 Box 3. COAL SECTOR RESTRUCTURING IN GREAT BRITAIN AND POLAND .............................................................. 45 Box 4. UKRAINE S POWER MARKET GOVERNED BY "OLD RULES OF THE GAME" UP TO MAY 1999 ......... ............... 49 Box 5. PRIVATIZATI'ION OF BRITISH ENERGY ....................................................................... 5 1 Box 6. POSSIBLE OUTCOMES OF A RESTRUCTURE OF THE COAL SECTOR ................................................................. 53 CHAPTER 4 Box 1. AN EXAMPLE OF RETROACTIVE ENACTMENT OF LEGISLATION .................................................................... 66 Box 2. AS A RESULT OF THE SHIORTAGE IF FINANCING, UKRAINE FORMS DIRECT BUDGET TRANSFERS (DBTs) FROM BUDGET ALLOCATIONS ..................................................... 75 Box 3. WHEN ALLOCATING GRANTS, THE MAJORITY OF COUNTRIES PREFER A FORMULA-BASED APPROACH ..................................................... 79 CHAPTER 7 Box 1. DEFINITION OF SHADOW ECONOMY ..................................................... 127 Box 2. SHADOW ECONOMIES INTERNATIONALLY ..........................130........ ..,,,, .....,.,.,,. .,,,,,,. 130 VI  ACKNOWLEDGMENTS This participatory economic study is based on Department, Ministry of Economy), and Ms. the findings of a joint team of the World Bank Zinkevych (Deputy Head of the Main and Ukrainian experts co-lead by John Hansen Department. Ministry of Economy). (Economic Advisor, World Bank Office in World Bank and other experts who assisted and Ukraine), Ihor Shumylo (Deputy Minister of complemented the work of the Ukrainian teams Econiomy of Ukraine) and Vira Nanivska included: Foreign Trade and Commercial (Director of International Center for Policy Policies: Michael Michaely with Veronika Studies). The participatory process in Ukraine Mov cha e ntal Fith Rerons: beefte fro th.udnefaGMA Movchan, Intergovernmental Fiscal Relations: benefoted from the guodance of a CEM AdvRsory Deborah Wetzel, Thomas Cochran, Mark Davis, Board composed of Mr. XVasyl Rohovv, Minister'' Advisoy . Sean O'Connel, Leonid Polishchuk and Lucan of Economy and Chair of the CEM Advsor Way; Public Expenditures on Educatio and Board, Prof. Anatoliy Halchinskiy, Advisor on Health: Fredenrck Golladayi Galina Sotirova, Macroeconomy to the President of Ukraine, and Kate:Schederick Ghanaraj Galara Legal t r s ~~~~~~~~~Kate Schecter and Ghanaraj Chellaraj: Legal the three co-leaders of the CEM process. Most of Threats to Fiscal Sustainability: Joachim the preparatory and review work was done Lippott (Legal Advisor, TACIS/UEPLAc); between June 1998 and June 1999. Agriculture: Csaba Csaki, Mark Lundell and Ian The analysis in this report draws on a series of Shuker; Banking Reform: Angela Prigozhina policy studies that were prepared by Ukrainian and Alan Roe; Coal Sector Policy: Heinz teams of experts, including the following: Hendriks: Shadow Economy: Maxim Ljubinsky; Agrarian Policy: Mr. Sablouk (Director, District Heating Policy: Carolyn Gochenour: Agrarian Policy Institute) and Mr. Fesina Electricity Market Reform: Laszlo Lovei, Istvan (Leading Research Fellow, Agrarian Policy Dobozi and Sergey Milenky, Environment: Institute); Energy Policy: Mr. Vrublevsky Alexi Slenzak; Education Finance: Katerina (Deputy Minister of Economy), Mr. Petrina; Fiscal Reform: Mark Davis; Gas Sector Kiriniachenko (Head of Department, Ministry of Policy: Laszlo Lovei and Konstantin Skorik; Economy), and Mr. Skarshevsky (Expert, Prime Housing and Water Sectors: Ihor Korablev; Minister Service); Education Policy: Mr. International Trade: Veronica Movchan; Labor Vitrenko (Head of Department, Ministry of Market: Arvo Kuddo; Pension Reform: Larisa Economy); Health Care Policy: Mr. Vitrenko Leshchenko and Katerina Petrina; Private Sector (Head of Department, Ministry of Economy), Development: Gregory Jedrzejczak and and Ms.Nagorna (Deputy Director, Ukrainian Vladimir Kreacic; Prospects For Economic Institute of Public Health Care): Fiscal Policy: Reform and Debt Sustainability: Andriy Mr. Chechetov (Deputy Minister of Economy), Storozhuk; Social Assistance: Galina Sotirova; Mr. Skarshevsky (Expert, Prime Minister and Transport Sector: Pedro Taborga. Service), Mr. Lornynoha (Head of Department. State Treasury of Ukraine). and Mr. Soldatenko Special credit goes to the International Center (Head of Sector, State Tax Administration), for Policy Studies, a leading NGO think-tank in Industrial and Foreign Trade Policy: Mr. Kyiv, for their support in this collaborative Vrublevsky (Deputy Minister of Economy), Mr. effort. A gEM facilitation team within CPS Tryneev (Head of the Main Department, comprising Sergiy Loboyko Volodymyr Hnat Ministry of Economy), and Mr. Yakubovskv Andriy Bega, Vasyl Lashchivsky, Nazar Mahera, Larisa Romanenko and Christina (Deputy Director, Research Institute of Ministry Lashchenko handled the complex process of of Economy); Shadow Economy Policy. Mr. chenat nde the omple prces, Borodiuk (Doctor of Economics, Accounting coordinating the work of the research teams Chamber of Ukraine). and Mr. Turchinov thereby making the participatory approach (Member of Parliament, Budget Committee, possible. A second team at ICPS headed by Hlib Verkhovna Rada); on Social Protection Vyshlinsky and Yevhenia Yehorova handled Policies: Mr. Yaremenko (Deputy Minister of publication of all reports produced by the CEM Economy), Mr. Soldatenko (Head of the Main process. Special thanks are also due to Nadezhda vii  Trovan and Tatiana Anderson for their dedicated In June 1999 the draft report was discussed in a work on document preparation, and to Victor joint Bank/Government conference in Kyiv Lukyanenko, Victoria Antoshchuk, Maria attended by representatives of the Government Korchvnska and Oksana Burakovska for of Ukraine, the World Bank, and a wide range of interpretation and translation. representatives from the academic, donor, NGO, domesienepieadfrinivsmt This report was prepared under the guidance of stic enterprise, and foreign investment Paul Siegelbaum (Country Director), Pradeep communities in Ukraine. Special thanks are due to all of the key ministers and ministries of the Mitra (PREM Director), Hafez Ghanem (Sector UkanaIGvrmn fo hIr xeln Ukrainian Government for their excellent Leader), and Gregory Jedrzejczak (Resident comments on the draft and for the opportunity to Representative). The peer reviewers were . .i.c Williaam Easterly (PRDMG), Alex Sundakov di ' . ~~~recommendations of the report. The current (Economic Researc'h Institute, New Zealand) and domerefets the many raluabe cmment Ma-e Dbrwsi(CSE Plad. document reflects the many valuable comments Mare' Dabrowki(CASE,Poland).that were received during the review process. The report draws significantly on the The views expressed here do not necessarilv macroeconomic analysis and data prepared by the IMF, TACIS/UEPLAC, HIID, KPMG reflect those of the reviewers or of the organizations for which the authors work. The Barents Group and other donors. C authors remain solely responsible for any errors that may remain in this paper. viii  ABSTRACT Traditionally the World Bank's periodic Significant volumes of human, material, and economic studies on borrowing member financial resources are involved in education, countries, studies known as "Country Economic and the key role of education in social and Memorandums," are written almost entirely by economic development justifies the need for an staff and consultants from the Bank's main in-depth examination of the scale and results of office based on a 2-3 week visit to the country. education, and how effectively resources are The report is written in Washington, formally allocated in the sector. reviewed inside the Bank. further revised, and The report on "Energy Policy" describes the then. as much as 6-9 months later, it is sent to the overmentfor evie andcleaancecurrent energy policy, provides its critical the Government for review and clearance, analysis and outlines prospective policies and Last year the Bank decided to try a distinctly obstacles that may hinder their implementation. different approach to preparing a CEM for It proposes a strategy for reforming the power Ukraine. Instead of having outside experts do sector aimed at establishing an efficient market most of the research and writing, they instead for fuel and power resources. were used primarily to support the work of local "Fiscal Policy" analyzes the tax and budget experts 111 a hi ghly participatory proces's experts.ina highly participay pros policies currently pursued that have resulted in desi-ned to maximize the Involvement of the deaignen t theml inv e the increased tax arrears and arrears payable from Ukrainians themselves in the analysis,' the budget: and proposes a strategy which would discussion, and writing about the problems of y.teeyhepn obul oa foster economic growth, and prvde a their ow country, thereby helping to build local comparative analyss of this policy with an capacity for analysis and consensus for reform. alterative one. alternative one. The participatory process durin:, the past year Th tcptrypoesdrn theaBased on the analysis of the state of the health centered on eliht Ukrainian research teams that care system, paper "Health Care Policy" were established to analyze the most difficult . ' . and~~~~~~~~~ imotn.ra fteUriineooy provides the objectives and strategic goals of this and Important areas of the Ukrainian economy- policv. Furthermore, it defines ways of fulfilling a-f culture, ecducat'on erg fisa agriclture ed n ethose goals and solving inherent problems. It management, health, industry, shadow economy, and social protection. Specialists from the World also examilnes basic obstacles that may prevent Band social prothetbion.aSpecalis fm intherioald the fulfillment of strategic goals as well as Bank and other bilateralandinternrecommendations for planning in the short term organizations participated in the work of each t I (for 1999 - 2000) and long term (for 3 and more group. Each research team went through a years) demanding process of issues papers. seminars, yr and final reviews. The report titled "Industrial and Foreign Trade Policy" focuses on the fact that, during a period The paper tte"Arraof falling demand for industrial products on assesses Ukraine's agrarian policy. It is very L_ in~~~~~ternal markets, industrial production needs important to ascertain why agricultural reforms have faile to achiev thi goladprdc ncreasingly to be oriented towards exports. Successful implementation of proposals aimed at favorable social and economic effects. It is improving efficiency and competitiveness of important not only to reveal the main causes of the crisis in agricultural production but also to define high-priority directions of short and long world commodity markets, establish currency reserves required for modernization and term agrarian policies for the futuire. restructuring of production, and foster economic The report on "Policy in Education" presents prosperity. strategic goals to be pursued by the state in The report "Shadow Economy Policy" defines education and proposes ways of achieving those .. t~~~~~~~- peculiarities and causes of growth aind goals. In addition, this chapter provides a transformation of the shadow economy in comparative analysis of policy alternatives. Ukraine, and how it affects the political and ix  socio-economic condition of the state. We give a benefits which may be achieved by reducing the definition of the shadow economy and list the shadow sector and legalizing it. main types of shadow economic activity The report on "Social Protection Policies" requiring practical restrictive measures. The supports efforts to overcome and deter poverty dynamics of shadow economy activity in through radically reforming the pension system Ukraine between 1990-1997 are given. The al report gives evidence of the adverse effects of po licies to idntfyeke ises employment policies to identfy the key issues large-scale shadow economy growth. Short and i p poio a long-term tasks and activity of power authorities establish reform guidelines, to assess readiness aimed at reducing the shadow economy are to adopt reforms; and to measure success thereof discussed. It also describes the economic in both the long and short-term. x  LIST OF ACRONYMS AND ABBREVIATIONS CEE Central and Eastern Europe CIS Commonwealth of Independent States EBRD European Bank for Reconstruction and Development FSU Former Soviet Union UNDP United Nations Development Programme OECD Organization for Economic Co-operation and Development IBRD International Bank for Reconstruction and Development IFC International Finance Corporation MIGA Multilateral Investment Guarantee Association IDA International Development Association IMF International Monetary Fund EFF Extended Fund Facility NGO Non Governmental Organization NBU National Bank of Ukraine HDI Human Development Index VAT value added tax FDI foreign direct investment GDP Gross Domestic Product GNP Gross National Product PPP Purchasing Power Parity NAS National Accounts System GFS Government Finance Statistics GNFS Goods & Non-Factor Services NPV Net present value OVDP State domestic bonds FX, forex Foreign Exchange MONETARY UNITS UAH = Ukrainian Hrivnya USD = U.S. Dollar USD 1.00 = UAH 4.50 (October 1999) xi   Building Consensus for Reforms: The Participatory Process xiii BUILDING CONSENSUS FOR REFORMS: THE PARTICIPATORY PROCESS John Hansen and Vira Nanivska, editors This report is one of three volumes about the of an advisory panel of senior specialists, economy of Ukraine that was produced during including both Ukrainians and non-Ukrainians. 1998-99 by an innovative, experimental Specialists from the World Bank and other partnership of World Bank and Ukrainian bilateral and international organizations experts. Traditionally the World Bank's participated in the work of each group. Each periodic economic studies on borrowing member research team went through a demanding process countries, studies known as "Country Economic of issues papers, seminars, and final reviews. Memorandums," are written almost entirely by Before launching its actual research work, each staff and consultants from the Bank's main research team met with its advisory panel and office based on a 2-3 week visit to the country, drew up an outline of the sector's key problems. The report is written in Washington, formally An issues paper summarizing the priorities reviewed inside the Bank, further revised, and tentatively established among the contending then, as much as 6-9 months later, it is sent to t the Government for review and clearaiice. that was sponsored by each research team. Last year the Bank decided to try a distinctly Based on the discussion of the issues during the different approach to preparino, a CEM for dC launch seminars, each research team developed a Ukraine. Instead of having outside experts do s f t questionnaire designed to determine what wereusedheprimarily tod support theywork ofnlcal leading thinkers and practitioners in each sector were used primarily to support the work of local a s()tems mpratpolm nec , . . ~~~~saw as (a) the most important problems in each experts in a highly participatory process designed to maximize the involvement of the seo, (b ) the poiieneed tof fixihs S . . , , . , ~anlyss problems, and (C) the readiness of the Ukrainian Ukrainians themselves in the leaders and people to implement these policies. discussion. and writing about the problems of , . ., , ~This innovative "Policy Readiness Survey"- their own country. thereby helping to build local . . . S . ~~~process polled an average of 35 individuals in capacity for analysis and consensus for reform. each of the eight sectors, thus involving nearly The participatory process during the past year 300 people in this dimension of the CEM centered on eight Ukrainian research teams that process. The results of these surveys play an were established to analyze the most difficult important role in the papers presented in this and important areas of the Ukrainian economy- volume, providing quantitative support for the agriculture, education, energy, fiscal analysis of these difficult issues. management, health, industry, shadow economy, Based on the conclusions of the launch seminars, and social protection. the teams moved ahead with their research. Each research team had one to four Ukrainian About half way through the process, each team professionals who did the analytical research and presented its interim findings in a work-in- wrote the reports presented in this volume. The progress seminar. With this additional guidance, experts in each area worked under the guidance the teams then completed their papers and held one or more dissemination seminars to discuss the results. These seminars, which sometimes The other volumes includc: World Bank (1999). involved over 50 people from a broad cross- Economic Growth with Equity: A Participatory section of civil society in Ukraine, provided Country Economic Memoranidum (A World Bank additional inputs which the teams used to revise Country Study). World Bank, Kyiv and Washington, their papers for presentation at the joint D.C.; and John Hansen and Diana Cook (1999). Government/World Bank review of "decision Economic Growth with Equity: Which Strategy for drfts" i Kyi Ukraine? (World Bank Discussion Paper No. 408). World Barnk, Kyiv and Washington, D.C.  xiv Economic Growth with Equity: Ukrainian Perspectives Total participation in the launch, work-in- experience of other countries in specific areas- progress and dissemination seminars exceeded an area of special comparative advantage for the 800. Another 200 or so participated in the two- World Bank as a knowledge-based international day joint Bank/Government review of the organization. Notes covered topics such as the decision drafts, which also involved senior reform processes in Estonia, Belarus, and officials from both the Government and the Argentina; value added taxation of exports and World Bank Office in Washington plus dozens imports, design of social safety nets, the merits of representatives from national and local and risks of special economic zones, and excise government offices, multilateral and bilateral tax rates in the EU. In addition to facilitating donor agencies, NGOs, public and private convergence on policy recommendations for the enterprise, academic institutions and the press. CEM, these notes also helped the government Simultaneous three-way translationi carry out the reforms needed to qualify for (Russian/Ukrainian/English) was provided for assistance under IMF and World Bank all seminars and for the final joint review, thus adjustment loans. assuring a free exchange of ideas across A major effort was made to discuss issues langyuage barriers throughout the process.A aoelrtwsmdtodcu ius emerging from the CEM process with the public This complex network of research teams and at large - the goal being to build awareness and seminars, which involved working with scores of support for the findings that would ultimately Ukrainians and outsiders, was designed and emerge in the final CEM documents. The team organized by the International Center for Policy leader in Kyiv worked with one of the leading Studies (ICPS) in Kyiv, a leading think-tank television stations in Kyiv to prepare a bi-weekly NGO which plays an important role in series of issue-oriented discussions focusing on promoting market-focused policy analysis and key economic policy problems of current discussion in Ukraine. The CEM Facilitation interest, and sector specialists visiting from Team at ICPS included Sergiy Loboyko, Washington to work with the local research Volodvmyr Hnat, Andriy Bega, Vasyl teams were encouraged to do segments for the Lashchivsky, Nazar Mahera, ILarisa Romanenko show whenever possible. Throughout the year- and Christina Lashchenko. long process, members of the Kyiv Economic Team at the World Bank Office in Ukraine The entire CEM process was guided by the parcat tiely in seminr rndtabne members of a CEM Advisory Board (who also participated actively in seminars, roundtables, memberas ofha CEMitoriadv Board (whothis asor) - workshops, and interviews for the print media, a serve as the Editorial Board for this report)- t'o- Mr. Vasyl Rohovy (Minister of Economy and two-way interaction that enhanced the CEM documents as well as building public Chair of the Board), Prof. Anatoliy Halchinskiy dending public (Advisor on Macroeconomy to the President of Ukraine), John Hansen (Economic Advisor, In short, in contrast to the relatively limited World Bank Office in Kyiv), Vira Nanivska number of one-time meetings that CEM mission (Director of the ICPS), and Ihor Shumylo members from Washington normally have while (Deputy Minister, Ukrainian Ministry of visiting the country to collect information, the Economy). * participatory CEM involved hundreds of The dialogue generated by the CEM process was Ukrainians repeatedly over the course of a year enhanced and extended through two other In analyzing and discussing the country's Notes" economic problems and policy options for the mechanisms - a series of "10/10 Policy Notes" future and In preparin written analysis and and an active media campaign. The Bank offered recommendations. to prepare notes of not more than 10 pages in ndo more than 10 days on any policy issues where the government needed additional information. These notes commonly focused on the policy 2 For a full list of the research groups and advisors, both formal and informal, see Annex A  1. AGRARIAN POLICY P.T. Sablouk Director Agrarian Policy Institute A.A. Fesina Leading Research Fellow Agrarian Policy Institute Ukrainian and international experts participating in the investigation: P.I. Hajdutsky, Deputy Head, Presidential Administration; O.M. Golovanov, Chief, Department for Problems of the Economy of Agro-industrial Complex, R&D Institute of the Ministry of Economy; Don van Atta, Expert, USAID; O.V. Kaliberda, Expert, the World Bank; Y.Y. Luzan, First Deputy Minister of the Econ- omy of Agro-industrial Complex of Ukraine; Peter Sochan, Expert, USAID; Csaki Csaba, Expert, the World Bank: L.G. Shmorhun, Head, Chief Department for Agro-industrial Policy, Ministry of Economy; O.M. Shpychak, Secretary, Academy of Agrarian Sciences; V.V. Yurchyshyn, Head De- partment, Agrarian Policy Institute, Ukrainian Academy of Agrarian Sciences; V. Demjanchouk, Head, Secretariat for Agrarian Reform of the Vice Prime Minister.  2 Chapter I TABLE OF CONTENTS I. INTRODUCTION ................................................... 3 II. ANALYSIS OF THE EXISTING POLICY ................................................... 3 CHARACTERISTICS OF THE CURRENT STATE ................................................... 3 CHARACTERISTICS OF THE POLICY ................................................... 9 III. FRAMEWORK OF THE PROSPECTIVE POLICY ................................................... 12 FORMATION OF EFFICIENT OWNERSHIP ................................................... 12 CREATION OF A FAVORABLE ECONOMIC ENVIRONMENT ................................................... 13 COMPARATIVE ANALYSIS OF THE ALTERNATIVE AGRARIAN POLICIES ................... ................. 15 IMPLEMENTATION OF THE PROSPECTIVE POLICY .................... ............................... 17 IV. CONCLUSIONS ................................................... 20  Agrarian Policy 3 I. INTRODUCTION Ukraine's agro-industrial complex (AIC) is one This report draws heavily on the actual results of of the largest and most important sectors of the AIC development. The authors are sure that the Ukrainian economy. In 1998 it accounted for evaluation of reform lessons would benefit not UAH 30.2 billion or 30% of total GDP. Of the only state officials dealing with AIC, but also total population, almost one third lives in agri- farmers and academics. cultural areas. The analysis of the existing state policy (Section The AIC to a significant extent determines the 2) highlights the key problems of the AIC. The development of the economy and the standard of declared goals actually coincide with the results living of the population. of a poll among governmental and non- Seven years of AIC reform are sufficient to governmental experts based on the questionnaire make not just provisional but definitive conclu- developed by the authors and aimed at identify- ing differences in opinion. It is a promising sign sions. This paper analyzes and assesses that the poll among 32 experts from 12 govern- Ukraine's agrarian policy. It iS very imprortant to ta h olaog3 xet rm1 oen Ukcertaine'sy agrarianupolicy. ros havery i tan to mental ministries and agencies, research centers, ascertain why agricultural reforms have failed torvl achieve their goal and produce favorable social and non-governmental structures revealed and economic effects. It is important not only to a high level of consensus regarding the key reveal the main causes of the crisis in agri problems of agrarian policy and ways to resolve 4- u- these problems. tural production but also to define high-priority t directions of short and long term agrarian poli- Similar consensus exists as to the framework of cies for the future. a prospective policy for serious transformations The AIC is in need of urgent reform. Policy- in the AIC as discussed in Section 3. makers should shift the main focus of reform to Implementation of the prospective policy is dis- the micro level, because it is here that crisis has cussed in Section 4, where both short and long- to be overcome. term measures are proposed. These important Agriculture and its organizational framework measures require careful stage-by-stage imple- grculur mentation.atonl raewr continue to be under significant influence of po- mentaton. litical factors. making reform of the agro- Conclusions orient policy-makers to the consoli- industrial complex more complicated. As a result dation of opinions as an important step towards of disagreements between the executive and the resolution of problems related to AIC devel- legislative branches of government, Ukraine has opment. not yet approved the Agrarian Policy Concept, and this aggravates the crisis in the sector. II. ANALYSIS OF THE EXISTING POLICY CHARACTERISTICS OF THE CURRENT STATE defined strategy. The production decline, in- T a icen- cluding in processing and food sectors, is not the The a.ro-industrial complex is in crisis. The result of the reform implemented in Ukraine but sis is primarily attributable to the fact that the rather the result of the lack of such reform. majority of agricultural producers as well as en- terprises and organizations from other sectors In the agrarian area, the issue of private owner- have difficulties marketing their products: more ship of land and property has been resolved only than 60% of the domestic demand for consumer in part. Agricultural enterprises have not been goods is covered by imports. Moreover, domes- reorganized into market structures. A market- tic consumption of the main foodstuffs has de- oriented agricultural infrastructure has not been creased dramatically' (see Table 1). established. Reform of the system of AIC ad- Ukraine still lacks both an Agrarian Policy Con- ministration proceeds slowly, and lending has cept approved by Verkhovna Rada and a clearly virtually dried up.  4 Chapter 1 Peasants, having received land shares, in theory, dermines market forces and hinders the devel- conclude unconditional agreements on transfer- opment of free competition in the agrarian ring their land deeds to enterprise managers. In market. the process they unwittingly become hired workers rather than lessors. Unresolved issues felated to impoverishment iD On the one hand, the distribution of land and certainl pockets of society, wago,e arrears plus property titles is almost over; on the other hand, stagnation of rural health care, services, and in the majority of collective farms this distribu- r~ etion was nominal rather than real. Mass privati- education are the realities of rural life. The pro- duction crisis in rural areas where up to 28r of zation was only one step towards the achieve- duction riiinrrlaesweeuto2%f ment of the main -Joal-the formation of land- all the labor force is concentrated causes mass m unemployment, bringing social tension to the owners in the agrarian sector. country at large. Mass privatization has complicated the market- With the breakdown of the pre-reform state sys- ing of products. especially in to the State. Previ- tern of distribution, non-market forms of distri- ously intermediaries had been actively involved bution became popular. Barter and in-kind labor in procurement and distribution of agricultural reutnberationme popused. toB triter andi d major p products. However, they have either went out of remuneration are used to distribute a major pro- bisnsdietexsivtaprsusoreri portion of the grain, vegetable oil, potatoes, business due to excessive tax pressures or reori- t, ~~~~~~~~ented thiemselves instead to importing. suuar beet, cattle, and poultry output. This un- Table 1. Per capita consumnption of the maini foodstuffs, in kilograms 1990 1996 1997 1998 Meat and meat products 68.2 37.1 34.7 33.6 Milk and dairy products 373.2 230.2 210.4 208.6 Eggs 272 161 151 160 Fish and fish products 17.5 4.3 5.0 5.1 Vegetable oil, margarine, and other fats 11.6 8.6 8.4 8.3 Vegetables, melons and gourds 102.5 91.9 90.5 88.7 Fmits, berries and grapes 47.4 34.8 39.5 36.6 Suear 50.0 32.6 30.6 31.3 Bread and baked products 141.0 123.5 126.5 124.6 Potato 131.0 127.9 134.4 128.7 Box 1. Some results of 1998 In 1998 a modest growth wvas achieved in the production of essentials including potato, vegetables, mlilk, eggs as well as oil crops and flax fiber. These products are in steady demand and small col- lective and private entities that cannvot afford to take risks prefer to produce theml. Seventy percent of settlemenits are done on a barter basis, and ever-increasing debts have virtually blocked the grain market. Gross output of grain decreased by a quarter relative to 1997 to 26.5 mlillion tons, whicl is twice as low as in previous years. Catastrophic losses durinig the harvest season reached the critical level and import of grain mlay be requiired (Ukraine needs 32 million tons of grain per year). In 1999 the government set a target of 35 mlillion tons of grain-- this is verv optimistic, given the negative de- velopmenits of recent years.  Agrarian Policy 5 Box 2. Definition of agricultural producers Accordinzg to existinig legislation, agriciiltiural produlcers iniclude collective agricultural enterprises (CAEs), joinit-stock companies (JSCs), co-operatives, peasants' uinions (a mnodification of CAEs), limited liabiliti comlpaniies (LLCs), additionial liability comiipanies, unlimited partnerships, genieral partnerships that combinie tle features of anl uiiiliniited partnership anid LLC, and individual farns, incluidinig family farms. Leased eniterprises (agrofirms) do n1ot differ from thlemz. Tlhe entities listed above are fill owners of their products. Table 2. Profitability (in percent) of agricultural products in the public sector of the AIC 1995 1996 1997 1998 All products 13.6 -11.7 -23.9 -23.0 including: Plant growving 55.5 29.7 14.5 6.6 Grain 83.6 64.6 37.5 12.5 Sun-flower 170.9 53.0 19.4 49.5 Sugarbeets 31.2 3.8 -10.4 -5.5 Vegetables 12.8 -26.5 -37.4 -15.0 Potato 34.3 6.4 -24.1 -10.2 Livestock farming -16.5 -39.7 -54.3 -49.8 Milk and daiiy goods -23.2 -44.0 -53.7 -42.8 Beef -19.8 -43.1 -61.5 -63.9 Pork -16.7 -42.1 -57.4 -48.7 Wool -61.3 -77.8 -85.6 -85.0 Eggs 36.5 -2.4 -5.5 -1.5 The number of collective enterprises is on the 84% of vegetable output, 68% of meat output increase due to division and "de-nationalization" and 62% of milk output. However. without in- of a portion of radhosps (so-called Soviet farms, creasing output in the public sector, a sufficient state-owned agricultural enterprises) and trans- volume of foodstuffs cannot be produced. formation into CAEs or joint-stock companies. Significant changes have also occurred in the use Graph 1. Land-use, in thousand hectares of agricultural land (Graph 1). 28774 31126 35000 28774~~~~~~~~300 The agricultural output decreased 25000 -20000 contsiderably 9927 15000 Agricultural output continues to decline (see 2701 . l- Table 3). The main goal of reform-the devel- 1991 1998 opment of a competitive agricultural sector and t__ _ __ _ ___m_d____h__-h__1d__________ establishment of a private sector-has not been achieved. Though the majority of former rad- Ukraine has failed to augment the progress made lhosps and kolhosps were transformed into CAEs in the agrarian sector before 1991 and previous and JSC. privatization of their land and assets is advances have even been reversed. It is unbe- purely formal. lievable but output of some crops has fallen to A major portion of agricultural output, excluding pre-second world war and even pre-revolution high-tech crops (i.e. grain and technical crops), levels. is produced by the private sector. Currently, pri- vate sector accounts for 76% of potato output,  6 Chapter 1 Table 3. Gross agricultural output (by category; at 1996 prices; mln UAH) 1990 1995 1996 1997 1998 Agricultural output 48,629 31,634 28,643 28,421 27,568 Plant-growing sector 24,346 17,949 16,386 17,654 17,200 Livestock sector 24,284 13,685 12,256 10,767 10,300 Source: State Statistics Committee The downward trends in output which marked output of milk (12,9 million tons versus the the 1993-1994 period and hit all spheres of the minimum nutrition standard of 22,8 million aararian sector continue, though to a lesser de- tons), meat (1.4 million tons versus 2,3 million gree. For example, while the overall volume of tons), eggs (7745.3 million versus 13144.2 mnil- agricultural output decreased by 32.6 percent in lion), grain (26,5 million tons versus 1994 relative to 1991, between 1994 and 1998 32 million tons), vegetables, melons and gourds the drop was 21.5 percent. (5,5 million tons versus 6,4 million tons). Stagnant agricultural production endangers state Livestock farming is in a critical state, the num- security. Output of certain products reached ber of heads is decreasing, especially in the pub- critically low levels. For examnple in 1998 the lic sector (Table 4). Box 3. The state of "de-nationalization" Land has been distributed in almost 11,000 private agricultural enterprises, or 98% of the total. 5.6 million citizens in 96.5% of agricultural enterprises were granted land share ownership certificates. Currently the infrastructure under the jurisdiction of the Ministry of Agriculture includes 6,000 processing, agro-servicing, and construction enterprises and organizationis. Of this number, 5,300 are in state ownership and 700 in communal ownership. Currently, 4,900 enterprises anid organi- zations, or 87% of those subject to privatization, including 4,200 enterprises in state ownership (86%) and 700 (100%) communally-owned enterprises, are being privatized. 1,200 processing en- terprises (93% of those subject to privatization) either have been privatized or are being privatized. The privatization of meat, milk, oil-fat, and confectionery' enterprises has been finished, and 180 sugarfactories (93 % of total) have been privatized. Recently work has been initiated in Ukraine to reform ownership relations in the baking sector and related enterprises, including flour-grinding, cereals, fodder industries, grain-elevators, groin - procuring organizations, as well as related nmaintenance and construction facilities. The overall number of suchI enlterprises is 878, including 204 grain depots, 91 elevators, 281 processing enter- prises. 7he total capacity of enterprises enable daily delivery of 1.3 million tons of graini, purifica- tion of 900,000 tons and drying of 530,000 tons of grain and 270,000 tons of corn. Capacity of Ukraine's elevators is 30 million tons of grain. Processing enterprises are engaged in processing and packaging of grain, production of flour, groats, and fodder. Their average annual capacity is 7 million tons of flour and 800,000 tons of groats. Taking into account the outlook for the grain market development in Ukraine in the near future, baking and related enterprises are likely to be the mnost attractive objects for investors.  Agrarian Policy 7 Table 4. Livestock (as at year end; thousand heads) 1986 1991 1996 1997 1998 Entities in all categories * Cattle 23727.6 15313.2 12741.8 11955.1 Cows 8851 8262.6 6971.9 6259.4 5953 Pigs 20088 17838.7 11235.6 9472.2 10329 Sheep and goats 9222 8419 3047 2829 2663 Agricultural enterprises Cattle 22797 20185.7 11545.3 8950.4 8005.2 Cows 6550 5986.1 4039.2 3321.6 2977.9 Pigs 15655 12557 5496 3979.3 4363 Sheep and goats 8336 7166 1540 1437 1340 Individual self-supporting houtseholds Cattle 3841 3541.9 3767.9 3791.4 3797.4 Cows 2301 2276.5 2932.7 2937.8 2975.1 Pigs 4433 5281.7 5739.6 5492.9 5966 Sheep and goats 886 1253 1492 1392 1323 * Incluiding peasant (farmer) hoiuselholds. In many cases, this also true for plant-growing. The situation in the AIC in general continues to Because of reduced purchasing power, domestic be unsatisfactory. In 1998 arrears on accounts products sell slowly and producers have to sell payable increased by 22% (UAH 13.2 billion), them below cost. This results in a reduction of arrears to the budget increased by 90% (UAH areas under crops (Table 5). 593 million), to the Pension Fund increased by Collective agricultural enterprises have suffered 150% (UAH 1.5 billion), wage arrears grew by the largest volume of alriculturap output decline 40% (UAH 2 billion). All products, except for theGarghst volume of agricu grain and sunflower, are loss-making. In the (Graphs 2 and 3). livestock sector, all branches are loss-making. By 1998 the volume of livestock produced by all Graph 4 shows the absolute level of losses. categories of farms decreased 2.5 times relative to 1990 and that produced by the public sector Graph 3. Output of the livestock sector decreased 4 times. per year, billion UAH Graph 2. Output of plant-growing, 30 l at 1996 prices, billion UAH 25 d h-0h _d _ 3C 1 20 0 , | ~~~~~~~~~h,13W1nvdulhouseholds l1 u 25 1 1.....0.. 150 1 1990 1995 1996 1997 1998 The financial position of agricultural enterprises, irrespective of the organizational or legal form,  8 Chapter I tends to deteriorate. For example, agricultural As a result of high interest rates, loans became enterprises in the public sector ended 1997 with unobtainable for agricultural enterprises. Over losses amounting to UAH 3324 million versus the last 7 years, lending to farms decreased more UAH 1421 million in 1996. Of 12,177 enter- than 20-fold. Budget financing of agriculture prises, 11,588 (90%-see Graph 5) were loss- also decreased to a critically low level. The making. Virtually all enterprises in the livestock above factors resulted in a payment crisis, hin- sector were loss-making. In 1998 the losses dered cash settlements (including those with amounted to UAH 2.8 billion; 9 out of 10 agri- budget) and caused barterization. cultural enterprises incurred losses. Table 5. Area under crops (at farms of all categories; mln. ha) Crops 1985 1990 1995 1996 1997 1998** Grain crops * Area under crop (thousand hectares) 16064 14522 13963 12506 14502 12449.1 Gross yield, thousand tons 47431 51009 33930 24571 35472 26462 Crop capacity, centners/hiectare 30.7 35.1 24.3 19.6 24.5 20.6 Sugar beet (factory grade2' Area under crop (thousand hectares) 1636 1605 1448 1260 1005 968 Gross yield, thousand tons 43845 44264 29650 23009 17663 16300 Crop capacity, centners/hectare 267 276 205 183 176 172.0 Sunflower seeds * Area under crop (thousand hectares) 1487 1626 2008 2025 2001 1993 Gross yield, thousand tons 2,602 2571 2860 2,123 2,308 2,100 Crop capacity, centners/hectare 16.5 15.8 14.2 10.5 11.5 10.8 Long-stalkedflax (fiber) Area under crop (thousand hectares) 208 169 96 55 32 40 Grossyield,thousandtons 110 108 48 18 9 14.0 Crop capacity, centners/hectare 5.8 6.4 5.0 3.3 2.9 3.1 Soy Area under crop (thousand hectares) 70 88 23 16 14 13 Gross yield, thousand tons 95 99 22 15 18 13.0 Crop capacity, ccntners/hcctarc 12.0 11.3 9.7 9.5 13.6 12.4 Potato Area under crop (thousand hectares) 1528 1433 1531 1549 1577 1533 Gross yield, thousand tons 17965 16732 14729 18410 16701 16199 Crop capacity, centners/hectare 122 117 96 119 106 112.0 Vegetables Area under crop (thousand hectares) 499 447 489 452 452 442 Gross yield, thousand tons 7449 6666 5880 5070 5168 5130 Crop capacity, centners/hectare 151 149 120 112 114 117.0 * In weight after processing. ;,* Source: State Statistics Committee; Ukrainian Agro-Industrial Complex: Current State and Outlook (1990- 2000). Institute for Agrarian Economy, Ukrainian Academy of Agrarian Sciences, Kyiv, 1999. pp. 69 - 80.  Agrarian Policy 9 Productivity of agricultural land and livestock is efficient owner and efficient manager which falling. This leads to a reduction in the volume would provide for a rapid increase in hi-tech ag- of biomass available for industrial processing. ricultural production by market-type enterprises Taking into account that imports are relatively based on private ownership. expensive, this causes a decline in the output of The majority of processing enterprises have a processing enterprises. low profitability of 3-12% (Table 6), and they are operating at 19-20% of their capacity. The Graph 4. The absolute level of losses of fishing industry is loosing money heavily. entterprises of the public sector, million UAH Table 6. Profitability of production in 3.500 3 324,4 processing sectors (%) 3003 2 870.0 3000 2 87 i,0 1995 1996 1997 Jan-Sep 250D ~~~~~~~~~~~~~~~~~~~1998 2000 1503 1 420.5 Food industry 22.6 12.2 7.4 8.3 1300l Food-flavoring 30.2 14.9 9.8 11.7 500 industry 1Q?2 1Q97 (998 Meat and milk 13.5 8.8 3.6 2.8 industry Souirce: Ministrv of Agriculture Meat industry 12.1 7.8 3.0 1.0 Butter-cheese 14.9 9.9 4.5 4.3 Graph 5. Number of loss-making and milk enterprises in the public sector industry Fish industry 1.1 -2.9 -7.3 -17.6 12000 11588 (0%) 11000 10025 (80%) CHARACTERISTICS OF THE POLICY 1 0000 9000 8392(60%) Government actions, which are hasty and unpre- 8008 dictable, resulted in an extremely complicated 700D situation. The rural population is especially dis- 6000 satisfied by the government's actions. The ma- 1996 1997 1998 jority of agricultural enterprises is functioning without cash. Non-payments are rapidly rising. Source: State Statistics Comnmittee The opposition uses the confrontation between Processinig sector the executive and legislative to discredit market reforms and to shake the faith of the population. The raw material base has deteriorated and vol- Ukraine still lacks up-to-date land legislation. In ume of processed agricultural products is stead- this context, it is unclear why the state ignores ily falling. For example, while production of the ownership issues. As a result, the manage- sunflower was 18% higher in 1995-1998 than in ment of the majority of large and medium-scale 1991-1994, production of vegetable oil over this enterprises does not report properly neither to period was down 30%. private shareholders nor to the state. The trend towards rapid reduction in the volume In the first half of 1998, the President issued a of processing is observed in the production of set of economic decrees to support agricultural sausages, butter, canned food, and baking. This z:1 ~~~~~~~~producers. These decrees provided for debt implies that agricultural production in Ukraine is write-offs, a 5-year moratorium on some debt becoming more oriented towards production of repayments, tax exemptions totaling UAH 2 bil- primary agricultural commodities (see Table 6). lion, leasing of machinery, reduction of the Currently, there is no rational combination of an amount of mandatory deductions to special  10 Chapter 1 funds, value-added tax; price support to meat A transition to market relations was done with- and milk sectors, material and technical support out legally-defined models and directions of re- and so on. In total, the sector received UAH 4 form. On the one hand, something was done to billion from state coffers. In 1999, agricultural liberalize market activity; on the other hand, sector is expected to receive subsidies of around there was almost no institutional and organiza- UAH 6 billion and more domestically produced tional innovation and transformation. agricultural machinery. 0 K~~~~~~~~~~ey problems As the results of 1998 show. financial support The state does not execute its function as a provided by the state fails to foster any growth in production, and the number of loss-making regulator of the economy. Instead, it tries to manage business processes in the AIC at all lev- enterprises Increases. If support In 1999 contin- Zt ues to be non-targeted, it will not produce posi- els, using so-called "loans against goods"- easy tive resnwlts. loans against physical procurement of raw mate- rials by processing enterprises, various forms of Our research also shows that: leasing, etc. Officially, this intervention in the * Official state policy related to agriculture economy is called "support to the agrarian sec- and AIC is mainly aimed at settlement of tor Numerous changes In the rules of the immedliate problems. game', including retroactive ones, have become common practice. * The state uses mainly non-market methods and grant support only to collective agricul- soviet times agr- policy was st- tural enterprises (of which 90% incur losses sighted. Products were supplied to the state at and one third is on the brink of bankruptcy), procurement prices, which failed to cover even a ancludiongdehivrd onfthe brink to baslvnkptc, quarter of the primary costs. These unrealistic includin delivery of goods to insolvent prices were well below prices at kolhosp mar- buyers. kets, to say nothing about world prices. Price * The state has failed to create an economic discrimination in agriculture is still in place. background that would promote the normal This results in an inflow of foreign foodstuffs functioning of all forms of enterprise. At the into the Ukrainian market. same time, adequate conditions have not The price disparity between industry and agri- been created for domestic and foreign op- culture, citv and village, affects the profitability erators in the Ukrainian market. erators inthUranand development of the agrarian sector. This * The government has neither its own Agrar- primarily concerns significantly increased prices ian Policy Concept nor a concrete program for power resources and means of production. for AIC development backed by the legisla- One more key problem is the tax and lending tion. policy of the state, which turned from an active * The actions of both central and local gov- stimulator. of agro-food reform into an adverse ernments are unpredictable. In particular, in factor ruining production and market potential. many cases the government violates its obli- As a result, agricultural production continues to gations (arrears for state orders, wage and be a low-profit or loss-making sector, except in pension arrears, etc.). the case of some agricultural products, like grain and sunflower. So far, the Verkhovna Rada of Ukraine and the Cabinet of Ministers have failed to officially ap- Another key problem is the issue of developing prove the Agrarian Policy Concept, its goals and the processing industry and market infrastructure its strategy. In addition, there is a rapid turnover in the AIC. This is decisive for the sector's re- of top officials responsible for AIC develop- turn to growth. Resolving the problem of im- ment. Newly-assigned heads of the government provement of the economic and regulatory and the sector bring new ideas which are not al- mechanisms applied in the AIC should become a ways consistent with preceding reforms, strate- government priority. This is the main prerequi- gic tasks and problems. site for the development of the AIC at the cur- rent stage.  Agrarian Policy 11 Reform of land relations Constraints Agrarian reform was on the political agenda only To some extent, the privatization process is con- in 1994-1995. Up to 1994 land reform had pro- strained by the lack of money. But a more im- ceeded at a very low rate. Transfer of land into portant constraint, according to respondents of collective ownership was suspended and issues our opinion survey, is the lack of procedure for of peasant ownership were not resolved. Existing granting land titles to individuals. legislation provided a right to land attached to a Due to over-regulation, the cumbersome and house, farmland, and land plots received by citi- . . o zen tha qui koop adrh s.Btfr intricate scheme of mutual settlements between those whot continuedosto ane memberspof collecti farmers and suppliers of fuel and energy, mineral those who continued to be members of collective fertilizers, and railway cars usually fails. Private agricultural enterprises (CAEs), land titles were suppliers tend to abandon the market because not stipulated. they do not get paid. The 1999 budget does not To give reform a new impetus, the President of provide for financing deliveries of mineral fer- Ukraine signed Decree # 166 of 10 November tilizers against future harvest. 1994 entitled On Urgent Measures to Accelerate A land market does not exist in Ukraine. The the Lanid Reform in Agricultural Production and few owners who received land can neither lease Decree # 729 of 8 August 1995 entitled On Pro- owners no useived lat er leage cedue orSharng Lnd Tansfrredto A ri- or let it, nor use it as collateral for a mortgage cedure for S ga eI loan which could become a major source of cultural Entterprises and Organizations as Col- working capital required to lease machinery, lective Owniership. purchase fuel, and so on. However, many ex- The decrees established a legislative framework perts fear that the Ukrainian government will for transformation of collective ownership into continue to provide "comprehensive help" to the private ownership. The issue of Certificates of agrarian sector in exchange for a share in future Private Ownership was introduced. New legisla- harvests, which has resulted in barterization and tion stipulated that a land plot may be subject to hindered the formation of a formal market for purchase, sale, donation, exchange, inheritance, agricultural products. or pledge. Some problems have still not been resolved leg- According to expert estimates, such an approach islatively. Individual kolhosps (and radhosps) is the most acceptable from both organizational show little interest in taking land into collective and political standpoints since it does not engage ownership. This is explained by anticipation of peasants in land border struggles and allows debt write-off and reluctance to bear responsi- preservation of the property and land integrity. bility for the state of business from the side of Moreover, it is based on private land and prop- managers. Collectives of some agricultural en- erty ownership. Peasants who show interest in terprises have not yet received state certificates independent private or collective business have formalizing the land rights. According to gov- the right to quit the CAE with their land and ernment policy, these issues may be resolved by property shares. local or state administrations. Thus, the first stage of land reform- The restructuring of agricultural enterprises into demonopolization of land ownership-appears efficient businesses proceeds too slowly. One to have been accomplished. But the second constraint is the unsettled issue of rental pay- stage-distribution of land plots among CAE ments and debt restructuring, as well as the lack members in the form of property and land of a favorable economic environment for market shares-is inexplicably suspended. activity. As a result, we have arrived at the most impor- Poor understanding of market tant stage of agrarian reform- transformation of CAEsintonewOrganizational forms of business Agriculture is adversely affected by current CAEs into new ownizatip. pricing policies, credit policy, taxation, and in- based on private ownership. adequacy of other economic instruments. Macroeconomic policy was so imperfect in its  12 Chapter 1 essence and subordinated to state fiscal interests recent years has suggested that the most expedi- that it began to contradict the interests of agri- ent approach is diversity in the market, since it culture and peasants. establishes conditions for sound competition. It A simplistic understanding of the market and is important for a seller to be a real owner of the A~ ~ ~ ~ ~ ~ ~ ~~~~~od offeredtl andrt n incme gaine marke tondde market relations as an elementary system based goods offered and incomes gained and to inde- pendentlv make decisions on sellin- goods and on free purchase and sale, which excludes any e m state regulation, dominates. The main feature of setting prices for them. market relations is the legislatively fixed right to A lack of a coherent state agricultural policy private, collective, cooperative, and state owner- . d ship of land with the right to free purchase and Having defined strategic goals. the government sale of land. failed to develop a program for stage-by-stage reform of the agro-industrial complex. Govern- 'I'here is an out-dated approach to structuring mental agencies failed to develop mechanisms subjects acting in the market. It has been stated for the achievement of these goals. that only private owners can efficiently operate in fre mrke. Tis tatmen wa th bais or On the one hand, the state wished to urgently In a free market. This statement was the basis for imlmn omld-aioaiaint raea adoption of legislative acts about accelerated implement formal de-nationalization to create an * . ~~~~~~~Impression of market transformations and reorganization of large-scale state-owned and collective enterprises without assessment of their thereby accelerate integration into European ireal efficiency. At the same time, Ukrainian and structures. On the other hand, the state made and world experience sugAt est that any owner may continues to make efforts to retain control over worl exprienesuges thtayonrmy the administration of the agro-industrial complex participate in the market; whether private, col- and aaricultral enterprisas. lective, cooperative, or state. The experience of and agricultural enterprises III. FRAMEWORK OF THE PROSPECTIVE POLICY The goal of agrarian policy 2. Creation of a favorable economic environ- ment and equal "rules of the game." There is an urgent need for drastic changes in the strategy and tactics of agrarian reform. At this FORMATION OF EFFICIENT OWNERSHIP stage of transition there is a need for regulation. with the focus of agricultural reform on the mi- Earlier practice of privatization and reform of cro level. the AIC not only failed to create efficient owner- We believe that Ukraine's agrarian policy should ship in the rural areas but also precipitated the outflow of investment from the agrarian sector. nurture and develop a competitive agrarian sec- in a n tor by establishing efficient ownership. In addftiona, state ow.ership almost eitiiely lost its functional certainty. In our opinion, in terms of market economics the As regards the creation of efficient ownership, state must assume responsibility only for those thegfollowin problem mt first badessed: tasks which the private sector is unable to carry out. This process should involve millions of in- 1. Redistributing land and assets from ineffi- dividuals who show desire to create yields on cient to efficient owners through: land plots. According to this principle, owners t,~ 0 *implementinIg private ownership and would undertake full responsibility for out- mechanisms of getting ownership comes. The task of the state is to create favorable rights, economic and legal conditions. rights, Given the points hitherto discussed and results of * restructuring ownership relations, the poll, focusing on the following two interre- * implementing legal, economic, and or- lated strategic tasks is required for achievement ganizational (administrative) mecha- of the goals of agrarian policy: nisms of reaping the benefits of private 1. Formation of efficient ownership. ownership,  Agrarian Policy 13 * developing and supporting small and terprises would become mobile, market-type medium-sized organizational forms of structures. business. The issue of development of the social sphere 2. Privatizing processing enterprises. should be gradually transferred to bodies of local self-government and, therefore, conditions 3. Restructurnng loss-making enterprises. ' . . would be created fostering the improvement of 4. Establishing a cooperative sector in the AIC. competitiveness of manufacturers of agricultural 5. Advanced training of personnel, especially goods. at managerial level, and improvement of the Private agricultural enterprises that range from quality of training for machine operators. 10 to 500 hectares and more, and which special- 6. Restructuring social assets and transferring ize in plant-growing and livestock breeding in them to local governments. accordance with internal and international de- t o rmand, will form the organizational basis for ag- 7. State support of efficient landowners and riculture. Large corporations (associations) agro-industrial enterprises. should orient themselves mainly to export 8. The state should create conditions for suc- activity. cessful functioning of the sector, these con- State support to small and medium-sized busi- ditions should be equal and transparent for ness in the AIC must be an important policy di- all sectors. The state must also create stable rection. Flexibility and ability to respond to "rules of the game" in the market. fluctuations in demand, as well as readiness to 9. Formation of specialized market infrastruc- assimilate technological innovations, this sector ture (wholesale markets for foodstuffs, raw would be able to rapidly extend the product mix materials, labor, etc.). with modest capital investment and foster pro- ductive employment of the population. In the system of new economic relations, land should have an owner: either associations of CREATION OF A FAVORABLE owners, Or individual peasants or farmers. It is ECONOMIC ENVIRONMENT impossible for an individual or collective to or- ganize an enterprise or business (which is deci- As regards creation of a favorable economic en- sive in a market economy) on land without vironment and equal "rules of the game" in the owning it. agricultural market, the following problem areas The right to sell and buy land would enable rural require immediate attention: residents to make considered decisions; whether 1. Pricing policy: support to prices and profits to conduct agricultural activity or not, and in of producers. what volume. 2. The market for agricultural products and In Ukraine. where the required legislative foodstuffs. framework for restructuring of inefficient ko- 3. Credits and interest policy: financial capital hosps and radlhosps and transition to new forms market. of organization of agriculture was created three years ago, reform processes are in reverse, 4. Taxes with allowance for the specific peculi- deepening the unsatisfactory state of the sector. anties of agriculture. Without defining the place of land in economic 5. Market infrastructure: informational and con- turnover, problems in the agrarian sector cannot sulting provision, market for material and be solved. It is groundless to anticipate a rapid technical resources. pay-off from new organizational forms of agrar- 6 ian business. Restructuring inefficient large- 6 Export and import scale agricultural enterprises is aimed at acceler- ated creation of working ownership in the form of peasant households, farms, and small and me- dium-sized enterprises. Thereby, large-scale en-  14 Chapter 1 The state must undertake the following high- * Extend the levy of lump-sum tax to include priority measures: agricultural manufacturers * Implement a compensation mechanism for * Tax exempt those enterprises which are spe- industrial goods consumed in agricultural cialized in providing informational and con- production. sulting services to agro-industrial enterprises . Establish minimum guaranteed prices and subject to re-investment of saved resources. * ERstablish minimum guaranteed prices and quotas for staples.' * Simplify export regulations. * Form a commodity exchange market for ag- * Provide support to enterprises able to manu- ricultural goods and foodstuffs, with an ac- facture competitive goods. tive state regulatory role (established ac- cording to the pattern of the National Bank * Define a policy to protect the internal mar- cordng o th pater of he atioal ankket from imported agricultural products of Ukraine in the currency exchange mar- k ket). where they can be domestically produced: * Fulfill state procurements exclusively As regards financial support., there are serious through the agrarian exchange market on an problems and discrepancies regarding these equal footing with all participants in the issues: market, * Non-targeted subsidies and annual com- modity credits against goods increase debts i Establish a specialized state land-credit bank and insuranice company (with its further 11- and take a sizable chunk of budget and credit corporation) for targeted crediting and insur- resources. ance of risks in the AIC. The starting capital * As a result of these Government actions. of these establishments should be no less loss-making enterprises find themselves in a than UAH 3.5 billion.- better situation because their debts may be written off. * Enhancement of financial influence on im- I Ed. Experience in other countries indicates that provement of the financial state of agricul- having the government establish minimum priccs is a tural enterprises should be achieved not by bad idea. Political pressures built over time to raise flooding them with funds at the expense of the prices to provide implicit subsidies to farmers. the budget, but aiited at production, re- Eventually, when the price gets too high the govern- orientation of the credit policy to satisfy ment has to step in and buy at the artificially high needs of the agrarian sector, investment ac- floor price, creating the direct budgetary burden and tivity., implementation of an active social distortino the market. A much better option is a well- ~~~~~~~~~~~policy In rural areas and protectionist policy run commodities exchange with the option to buy and r_. . in the internal commodity marlcet. sell futures. A farmer can then lock in the price for his crop or herd by selling now on this market for future delivery. 2 Ed. World experience with dedicated single-sector banks has generally been bad. The banks commonly fail because (a) they become belholden and subject to political pressure groups in the sector, and (b) thev have no protection through cross-sector diversifica- tion, from a bad crop year, for example. A much bet- Ed. If a product can be produced efficiently, it does ter approach, as outlined elsewhere in this report, is not need protection, provided the exchange rate and to establish private land holdings that can be used as other sector /macro policies are right. If the product loan collateral and to develop a strong commercial needs protection, it is probably not being produced banking sector that will lend for any good business efficiently - and protecting its production will waste opportunity-including crop, livestock, food proc- domestic resources and raise costs to domestic con- essing and agricultural input/output distribution sys- sumers. A better approach is to remove any barriers tems. to efficient production.  Agrarian Policy 15 COMPARATIVE ANALYSIS OF THE ALTERNATIVE AGRARIAN POLICIES Strategy Developnmenit of a competitive agrarian sector Secured food supplies Goals Formation of efficient ownership. Provision of the country with Creation of a favorable economic environment a minimum required volume and stable "rules of the game" in the market. of foodstuffs. Restoration of the AIC's vitality. Problems to be Low competitiveness and losses incurred by the Lack of markets for solved sector. agricultural products Need to use fiscal mechanisms for implicit and Lack of market explicit subsidization of the sector. infrastructure, including Need for the state to provide manufacturers of information and consulting agricultural goods with fuel, material and and financial-and-credit and * ' * r .'1' . T 1 . ~~insurance services. technical resources, fertilizers, etc. Implement functions of organization of processing, storage, Lack of transparency transportation, sales, and so on. Instability of the "rules of the game" and discrepancies therein. Way to solve the Include agricultural lands into economic Restoration of state orders problems turnover: for major agricultural * accomplishment of privatization and issue of products. appropriate state acts. Budget support to the AIC: * adoption of the Land Code. which would subsidies and tax establish a land market exemptions, restrlcturing of debts and write off of tax and Create conditions for restructuring of loss- other arrears, other benefits. making agricultural enterprises. Steady participation of the Accomplish privatization of processing Government in a supportive enterprises of the AIC with focus on investment capacity at all stages of the obligations and establishment of export zones economic cycle by making for production and large, export-oriented appropriate governmental corporations and cooperatives. and legislative decisions. Restructure social assets in the agrarian sector. Protectionist policy in Restrict government intervention. respect to internal producers. Regulate sales opportunities in the agricultural State support to a non-market market through procurements and interventions, system of export, in minimum procurement prices, customs duties, particular, efforts to hold the and taxes. positions in traditional export Stabilize legislation dealing with agrarian markets through subsidizing business and agrarian relations. exports and inter- governmental barter Introduce temporary restrictions on importing operationsm those products which are produced in sufficient quantities in Ukraine and are exported where conditions exist to increase the volume of their output.  16 Chapter I Strategy Development of a competitive agrarian sector Securedfood supplies Consequences Long-term (3 years +) Long-term (3 years +) of implementa Establishment of real ownership of land and ag- Provision of a minimum tnon. ricultural enterprises of the AIC, opening an op- level of foodstuffs and agri- portunity to obtain money equivalent to land and cultural products. property shares when quitting the collective en- Significant increase in com- terprise.~ ~ ~ ~~~~Samin mceseI cm terpnse. petitiveness of the sector in Formation of efficient economic mechanisms for general, except for individual the AIC. enterprises. Increased volume of production in accordance Increased volume of outputs with the need to make profit, foreign trade and of agro-industrial enterprises. reserves. Increased need for implicit Merged competitive sectors of agrarian business. and explicit subsidization. Identification of leading enterprises as models of Development of large-scale innovative experience. state and semi-state compa- Development of specialized market infrastruc- nies that provide the agrarian ture. sector with mineral fertiliz- ers, fuel, etc. and distribute Development of the wholesale food markets and their outputs in exchange for markets for agricultural raw materials, land, la- these deliveries. bor resources, financial and production capital, Decay of social infrastructure scientific-technological products, etc. in rural areas. Increased volumes of production and export of products of processing enterprises of the AIC, privatization with due allowance for interests of agricultural commodity manufacturers. Increased real level of incomes of both agro- industrial enterprises and their employees. Improved financial provision of infrastructure in the rural areas. Short-term (first 2 years) Short-term (first 2 years): Distribution of modern efficient technology Increased tax disparity be- Numerous bankruptcies of inefficient enterprises tween the agrarian and other and an increased number of profitable agricul- sectors of the economy tural enterprises. ILack of improved investment Decreasd n r of land financial attractiveness Decreased number of low-income citizens inomh etr ecp o n rural areas. of the sectors (except for in- dividual short-term projects Aggravated social problems. and state-supported projects). Significant business boom in all sectors of the Substitution of private in- AIC with a stable growth rate of production and vestment and crediting with increased employment of the population. state investment and credit- Increased volume of crediting and repayments ing. of credits. Reduced foreign competition against Ukrainian commodity  Agrarian Policy 17 Strategy Developmenit of a conmpetitive agrarian sector Securedfood supplies Decreased volume of barter operations and out- manufacturers and decreased standing mutual debts. volumes of legally imported Increased investment attractiveness of the agro- food and agricultural prod- industrial sector. ucts. Formation of primary markets for market- Stabilized production and exchange agricultural raw materials. some increase in the volume Privatization of processing enterprises. of sales of outputs of AIC Leveling of inter-sector price disparities, in- enterprises. Continuation of barter set- creased profits of agro-industrial enterprises and tlements and outstanding their payments to the budget. mutual indebtedness, espe- Creation of conditions reducing the need for cially in collectively owned constant subsidization. enterprises. Formation of social reform conditions at the Increased pressure on the level of local self-government. expenditure side of the budget and budget deficit. Aggravation of the problems of rural social sphere. IMPLEMENTATION OF THE PROSPECTIVE contents of a prospective agrarian policy out- POLICY lined in our questionnaire, the authors conclude that the majority agrees with the goals of the lnaUkrariane several and prospc socio-economic proposed policy, its strategies. key short-term agrarian policy and prospective challenges and those challenges that are to be development of the AIC exist concurrently. addressed after 3-5 or more years. The most im- They differ in the goals and scale of transfor- portant issue on which expert opinion differs mation, as well as methods and means to concerns processing enterprises- should they achieve these goals. Advocates of some con- be fully owned by agricultural enterprises as co- cepts support the breakup of the existing system operative associations or should they be inde- of agriculture, adherents of another set of con- pendent privatized entities? The fact that opin- cepts work for temperate, conservative measures ions on this matter differ may adversely affect and propose restoration and preservation of the the pace of privatization. pre-reform system. Promoters of one more set of concepts propose considered constructivism. Today practically all land is shared, but owners This very position is shared by the authors. of land plots cannot dispose of their land shares However, none of the existing concepts has because they are only offered monetary compen- been officially considered by the Verkhovna sation in cases where membership in collective Rada of Ukraine to date. enterprises is discontinued. Therefore, the lack of consensus on the issue of whether just mone- The policy promoted by the authors is a strategy tary compensation for land and property share aimed at creating a competitive agrarian sector should be granted to a person quitting a collec- through accelerated formation of efficient mar- tive enterprise or land itself should be put at ket-type organizational and legal forms of busi- his/her disposal may become a significant ness based mainly on private ownership. obstacle to the strategy of efficient ownership Major d iJ&rences in opinionis formation. Taking into account results of the investigation Issuies suppor-ted by the nlajority of differences in expert opinion and having ana- There is a consensus between governmental and lyzed responses to the questions concerning the non-governmental experts in agrarian policy proposed by the authors.  18 Chapter 1 Regarding the key problems of agrarian policy, owners' rights remain unsettled. This is also it should be noted there is an understanding that true for property relations in the agro-industrial further reforms are required. Respondents prefer complex. private ownership and there is a unanimity be- Obstacles to implementing the new policy tween both governmental and non-governmental experts in this matter. This concerns both land Despite the fact that the majority of respondents redistribution in general and land relations in prefer private ownership to land rather than col- particular, including the issue of land markets. lective and state ownership, creation of efficient There is virtually no support for the collective ownership in practice is hindered by the unset- form of ownership. even in its current form. tled issue of ownership rights in case of discon- All participants of the poll critically assess the tinued membership in a collective enterprise. existing pricing policy and systems of financial This is the largest obstacle to the strategy of and credit provision and taxation. They point to nurturing and developing a competitive agrarian the importance of accelerated development of sector. real agricultural markets. In addition, there is uncertainty over privatiza- There are reasons to state that respondents sup- tion in the processing sectors. Manufacturers of agricute are aso to ta tha transfsrp port conceptual ideas outlined in this analytical iultural goods are opposed to the transfor- mation of state-owned monopoly enterprises report as well as the goal of agrarian policy that . O y e provides for development of competitive agri- into private or commercial monopoly enter- culture. Private ownership in the agrarian sector prises. Ukraine needs a new concept of how to should dominate, though conditions for realizing develop processing sectors. Table 7. The issues with the lowest degree of agreement (the highest level of dispersion in responses) Dispersion Supported Not supported No opinion Govern- Govern- Govern- Total mental Total mental Total menital Processing enterprises should be in full ownership of agricultural enterprises as cooperative associations. 1.81% 46.9% 55% 40.6% 25% 12.5% 20% Money compensation for land and property share on discontinuation of memberslhip in a collective enterprise. 1.71 50% 60% 34.4% 25% 15.5% 15% Table 8. Consensus on the main strategies Strategic areas of agrarian policy % of consensus governmental experts non-governmental experts Essence and goals of the proposed agrarian policy 87.8 91.0 Formation of efficient ownership 88.1 69.5 Creation of a favorable economic environment and "rules of the game" in the market 77.8 81.2  Agrarian Policy 19 Respondents consider that the factors hindering export production zones and large-scale, ex- creation of a favorable economic environment port-oriented corporations and cooperatives. include: imperfect prices and pricing policy, lack * establish the land market and a set of mort- of exchange mechanisms, a poorly organized gage (land) banks. internal market, barter operations, lack of regu- * restrict intervention of authorities in the ac- lated prices and incomes, state intervention in tivitervention in the a c- production, and an imperfect financial and credit tivity of participants in the agrarian market. system (especially the shortage of credit re- * regulate (by economic means) sales oppor- sources and complicated access to them). tunities in the agrarian market through pro- curement and intervention, minimum pur- chase prices, customs duties, and taxes. * the lack of agreement between branches of * stabilize legislation dealing with agrarian power regarding the strategy and key issues business and agrarian relations, except for of agricultural development. their further liberalization. * the Government's adoption of its familiar * impose temporary restrictions on the import role of permanent guiding and making deci- of goods which are produced in Ukraine in a sions in the agrarian sector through the sys- sufficient volume and are exported, or whose tem of commodity credits, various financial output may be increased. Adopt at the level privileges, etc. of a legislative act a Concept of agrarian * discrepancies between levels of qualification policy based on the proposed strategy. of personnel (at managerial and lower lev- * initiate the integration into processing enter- els) and the requirements of modern agri- prises of manufacturers of agricultural goods culture. by establishing integrated professional asso- Drawbacks and points for criticism include: ciations with defined productive and mar- keting functions aimed at achieving final re-