37846 A Stocktaking of Land Reform and Farm Restructuring in Bulgaria, Moldova, Azerbaijan and Kazakhstan by Nora Dudwick Karin Fock David Sedik June 2005 Environmentally and Socially Sustainable Development Europe and Central Asia Region TABLE OF CONTENTS ACKNOWLEDGMENTS......................................................................................................................................III EXECUTIVE SUMMARY....................................................................................................................................IV INTRODUCTION.................................................................................................................................................... 1 WITH GOOD OVERALL PROSPECTS, GOOD AGRICULTURAL POLICY AND GOVERNANCE INDICATORS, WHY ARE BULGARIAN RURAL HOUSEHOLDS SO BADLY OFF? ............................. 4 THE CONTEXT OF LAND REFORM............................................................................................................................ 4 THE DESIGN AND IMPLEMENTATION OF LAND REFORM AND AGRICULTURAL PRODUCTION.................................. 5 LOCAL GOVERNMENT REFORMS AND PUBLIC SERVICE FUNDING........................................................................... 7 DISPOSITION OF LAND RECEIVED ........................................................................................................................... 7 ECONOMIC PERFORMANCE OF FARMS .................................................................................................................... 9 WELL-BEING OF RURAL HOUSEHOLDS ................................................................................................................. 11 RURAL SERVICES, SOCIAL BENEFITS AND COMMUNITY LIFE................................................................................ 13 CONCLUSIONS ...................................................................................................................................................... 14 WITH A WELL-DESIGNED LAND REFORM SHAPED GREATLY BY DONORS, WHY HAVE FARMS IN MOLDOVA NOT PERFORMED BETTER? ............................................................................... 15 THE CONTEXT OF LAND REFORM.......................................................................................................................... 15 THE DESIGN AND IMPLEMENTATION OF LAND REFORM AND AGRICULTURAL PRODUCTION................................ 16 LOCAL GOVERNMENT REFORMS AND PUBLIC SERVICE FUNDING......................................................................... 19 DISPOSITION OF LAND RECEIVED ......................................................................................................................... 19 ECONOMIC PERFORMANCE OF FARMS .................................................................................................................. 20 WELL-BEING OF RURAL HOUSEHOLDS ................................................................................................................. 23 RURAL SERVICES, SOCIAL BENEFITS AND COMMUNITY LIFE................................................................................ 24 CONCLUSIONS ...................................................................................................................................................... 24 WITH SOME OF THE POOREST GOVERNANCE INDICATORS IN THE CIS, HOW DID AZERBAIJAN IMPLEMENT A LAND REFORM VIEWED BY FARMERS AS QUITE FAIR, AND WHICH LED TO A SUBSTANTIAL INCREASE IN PRODUCTIVITY? ................................................... 26 THE CONTEXT OF LAND REFORM.......................................................................................................................... 26 THE DESIGN AND IMPLEMENTATION OF LAND REFORM AND AGRICULTURAL PRODUCTION................................ 27 LOCAL GOVERNMENT REFORMS AND PUBLIC SERVICE FUNDING......................................................................... 30 DISPOSITION OF LAND RECEIVED ......................................................................................................................... 30 ECONOMIC PERFORMANCE OF FARMS .................................................................................................................. 31 WELL-BEING OF RURAL HOUSEHOLDS ................................................................................................................. 34 RURAL SERVICES, SOCIAL BENEFITS AND COMMUNITY LIFE................................................................................ 35 CONCLUSIONS ...................................................................................................................................................... 37 KAZAKHSTAN: SURPRISING RESULTS FROM A POOR REFORM?.................................................... 38 THE CONTEXT OF LAND REFORM.......................................................................................................................... 38 THE DESIGN AND IMPLEMENTATION OF LAND REFORM AND AGRICULTURAL PRODUCTION................................ 39 LOCAL GOVERNMENT REFORMS AND PUBLIC SERVICE FUNDING......................................................................... 44 DISPOSITION OF LAND RECEIVED ......................................................................................................................... 44 ECONOMIC PERFORMANCE OF FARMS .................................................................................................................. 46 WELL-BEING OF RURAL FARMING HOUSEHOLDS.................................................................................................. 49 RURAL SERVICES, SOCIAL BENEFITS AND COMMUNITY LIFE................................................................................ 50 CONCLUSIONS ...................................................................................................................................................... 51 GENERAL CONCLUSIONS AND IMPLICATIONS FOR POLICY............................................................ 53 ANNEX I: FOUR-COUNTRY TABLES AND FIGURES................................................................................ 60 ANNEX II: BACKGROUND INFORMATION ON WORLD BANK SURVEY OF FARMS, 2003.......... 71 REFERENCES ....................................................................................................................................................... 73 ii ACKNOWLEDGMENTS The core task team consisted of Nora Dudwick (task team leader), Karin Fock, David Sedik (FAO), and Johan Swinnen. Field work was carried out by Synergetics (Azerbaijan), Blackstone Corporation, supported by the Agency for Socioeconomic Analyses (Bulgaria), Bisam (Kazakhstan) and the Agency for Restructuring Agriculture (Moldova). Background papers were prepared by Michael Thurman, Renee Giovarelli, Tokhtar Esirkepov, and Anar Kazimov. Zongmin Li provided important input into the gender content of the study design and implementation. Taras Pushak and Liesbet Vranken helped analyzed analyze HBS and farm survey data. Frauke Jungbluth assisted during the conceptualization of the study. Arvo Kuddo provided consultation on aspects of rural service provision. Natalia Otel and Sheetal Rana contributed substantive and logistical support. Beaulah Noble provided consistent administrative support. Resident mission staff in each country helped the work both conceptually and logistically. ECSSD management, including Laura Tuck, Benoit Blarel, Joe Goldberg, Alexandre Marc and Maninder Gill, guided the report. John Bruce and Klaus Deininger constructively peer reviewed an earlier draft. The study received funding from the Norwegian Trust Fund, the Bank-Netherlands Partnership Program, UNIFEM, and German Consultant Trust Funds. iii Executive Summary Over the past decade the rural sector in nearly all the countries of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS) has undergone a shift from predominantly collective agriculture to more individualized agriculture. Over a ten year period, between 1990 and 2000, over 145 million hectares of land were transferred to private ownership. This transfer is considerably larger than previous land reforms, including Mexico's land reform (lasting nearly a century from 1917 to 1992 and transferring about 100 million hectares), Brazil's land reform (lasting 30 years and transferring 11 million hectares), the Japanese land reform (which transferred about 2 million hectares), as well as land reforms in Korea and Taiwan (which transferred 0.5 and 0.2 million hectares) (Deininger, 2003). Despite the significance of land reform in these countries, there are few comparative studies of how different policies have resulted in different apparent outcomes in the region.1 Though the dimensions of land reform are impressive and the changes many, land reform does not yet seem to have lived up to its potential in many countries of the region.2 There are at least two potential long-run benefits from distributive land reform and farm restructuring-- an improvement in farm production efficiency and improved access to land for poor rural inhabitants. In many countries of the region the contrast between these widely acknowledged potential benefits of land reform and rural realities could hardly appear wider. The past decade and a half has seen the largest fall in agricultural production, yields and rural employment on record in many of the countries of the region. Poverty rates in this part of the world rose greatly in 1990s, and for most of the countries rural poverty headcounts are higher in rural areas. Furthermore, the deterioration and then dissolution of collective and state farms was accompanied by a significant drop in rural public services. The contrast between these two pictures in many of the countries of this region have led many to question to what extent land reform itself has been responsible for these negative developments and why land reform does not appear to have fulfilled its promise of pro-poor growth in rural areas. There is therefore a great need for a critical review, a stocktaking, of land reform and farm restructuring to document what is known about the apparent effects of land reform and farm restructuring and to understand why land reform has not lived up to its potential in many of the countries of this region. A stocktaking of land reform and farm restructuring must be realistic as to what it can achieve and what it can not. It can not offer a complete impact analysis of land reform policies, because of the difficulties of rigorously establishing causation. A stocktaking of land reform and farm restructuring can, however, offer a structured and comparative review of some key aspects of land reform and farm restructuring policies. It can document important differences in policies between countries and some of their immediate effects. One such effect covered in this study is the change in crop and livestock yields that resulted from the physical transfer of land from corporate to individual farms. It is much less reliable in establishing longer term harmful or beneficial effects of land reform. This paper presents such a stocktaking of land reform and farm restructuring in four countries of the Europe and Central Asia region that have had particular difficulties in land reform, farm restructuring, farm performance or rural poverty. It is organized by case studies, each of 1Lerman, Csaki and Feder (2004) is perhaps the most recent study with an excellent bibliography. 2On the promise of land reform see Deininger (2003, 2005). iv which is designed to analyze a central conundrum about land reform and farm restructuring in an individual country. Much of the information presented in this review derives from farm and household surveys conducted in each of the four countries in 2003 and 2004. The surveys were designed to provide information that would be comparable across countries. Surveys were supplemented by individual and focus group discussions. Analysis of land reform and farm restructuring in Bulgaria, Moldova, Azerbaijan and Kazakhstan in this way suggests a series of conclusions with implications for policy. Conclusions of a general nature are followed by country-specific ones. Land reform does not seem to have been responsible for the fall in agricultural production and productivity observed in the countries in this survey. The distribution of land in the three CIS countries for the most part followed the decline in gross agricultural output and deterioration in agricultural yields and labor productivity. In Bulgaria a third of the decline in production, half of the deterioration in labor productivity, 17 percent of the decline in crop yields and the entire decline in animal yields preceded the beginning of land restitution. The fall in agricultural production before land reform contrasts with the situation of growth in production and productivity (in nearly all the countries surveyed) after land restitution and distribution. For most indicators and for most countries performance after land reform began was considerably better than before. In Azerbaijan, there was positive growth in every indicator after land reform began in 1996. These two facts--that agricultural production began to deteriorate before land reform and that production began to grow only after land reform--seem to indicate that land reform is more likely a part of the solution than a part of the problem in these countries. In the absence of land reform the deterioration in output that characterized the early 1990s may well have continued, because much of the root of the problem was a deteriorating collective farm system. The choice governments faced in Moldova (1998), Azerbaijan (1996) and Kazakhstan (1998) was not one of rural "developed socialism" of the Brezhnev era vs. land distribution and farm restructuring. It was one of a deteriorating agricultural sector under half-way reforms vs. land distribution and farm restructuring. Thus, the counterfactual of no land distribution and farm restructuring was continued deterioration. It is not surprising that governments chose reform under these circumstances. Though land reform may potentially contribute to pro-poor growth by increasing farm efficiency and distributing land widely, it is only one of many important complementary reforms and can not be expected to stimulate sustainable pro-poor growth by itself. This survey has illustrated that the transfer of agricultural production from corporate to individual farms in the three CIS countries contributed to improved sector performance by increasing both crop and livestock yields. This is largely because yields in individual farms were higher than those in corporate farms (with the exception of livestock yields in Moldova). This has been the immediate effect of land reform in these countries, but it does not do justice to the potential of land reform in the long run. But land reform is not sufficient by itself to ensure better farm performance. In each of the countries considered a number of complementary policies were identified that shaped the v enabling environment for agriculture either positively or negatively. Macroeconomic instability in the early 1990s led to a fall in GDP in each of the countries. For most of the 1990s in Bulgaria, Moldova and Azerbaijan agricultural producer prices were significantly below export prices, providing a production disincentive. These price differences seem to be a result of government restrictions on trade in agricultural commodities. Falling GDP and low producer prices created a poor environment for growth in agricultural yields or production. The macroeconomic and enabling environment for agriculture in the countries considered here improved by the mid- to late 1990s. Inflation rates fell and GDP began to grow. Internal and external agricultural prices grew closer. In Bulgaria both the macroeconomic and enabling environment improved after 1997/98. In Moldova the macroeconomic record improved after 2000, but the enabling environment for agriculture is still poor. In Azerbaijan the macroeconomic environment improved after 1996, though the enabling environment for agriculture remains poor. In Kazakhstan the macroeconomic environment improved after 1996, but the enabling environment for agriculture has improved mostly for large farms. None of the governments of the countries covered in this survey have met the challenge of ensuring a truly good and sustainable enabling environment for agriculture to ensure that farms will be competitive in world markets. Bulgaria has gone the furthest in ensuring an enabling environment for agriculture. However, there is no evidence to indicate that Bulgarian corporate farms have been forced to reduce labor rolls in order to reduce costs of production, as can be observed in the competitive corporate farms of Central Europe. In Moldova and Azerbaijan producers seem to be taxed by internal and external trade barriers and ad hoc interventions by the government on agricultural markets. In Kazakhstan, enabling policies seem to favor large farms over small. The lack of a sustainable enabling environment for agriculture in the CIS countries has two sides--a lack of support policies that foster competitive producers and the proliferation of support policies that tend to support large farms without fostering efficiency increases. First, governments of the countries surveyed have failed to take sufficient steps toward restructuring government and public institutions to serve the needs of private agriculture. This is evidenced by the lack of an active extension program, reshaped food safety regulatory policies, rural farmer early retirement schemes, rural development programs, etc. Second, government policies instead aim to support farm enterprises directly with loose credits or state support, by eliminating the possibility of bankruptcy, by restrictions on marketing, production and employment policies. These policies usually concern corporate and large farms, because they are the most visible, have the most employment and their managers often have close links to government. Such farms themselves usually lobby for such support. These policies tend to reinforce old-style large corporate farms with little attention to efficiency increases. While in the Czech and Slovak Republics and Hungary, many corporate farms have improved their performance, such that they perform as well as family farms, this achievement required a sustained policy environment of complementary reforms which are quite challenging for governments particularly in CIS countries. There are perhaps three complementary reforms that have facilitated better performance of corporate farms in these countries. First, there seems to have been a true break with soft budget policies, such that the government does not favor large corporate farms with subsidies, easy credit programs, marketing restrictions, bankruptcy policies or other special treatment. Second, in the Czech and Slovak Republics there are expensive rural pensions and unemployment programs to support agricultural labor that has been laid off from large corporate farms. These non-farm income sources both offer vi an incentive to leave farming and compensate for earnings when workers are laid off. This is why labor can be shed from corporate farms in these countries without local authorities and ex-workers raising havoc. Third, corporate farms in these countries are interested in reducing costs of production in order to remain competitive because they have no choice. They must compete on European markets with Western European producers with low costs of production or they do not survive. Even before the Czech and Slovak Republics were part of the European Union, both the governments and corporate farm managers knew accession was coming and farms adjusted their behavior to these circumstances. These complementary reforms are difficult to reproduce in the CIS countries and other poor countries, particularly if they are not in line for EU accession. At the present time the political economy in these countries would not support such reforms. In the absence of these conditions in Azerbaijan and Kazakhstan, and in view of the fact that governments in these countries pursue policies that do not facilitate the kind of changes corporate farms require to increase their competitiveness, there are reasons to believe that corporate farms will not perform as well as family farms. In fact, the World Bank survey showed that the total factor productivity of family farms was consistently higher than corporate farms in Kazakhstan and Azerbaijan. The predominant farming technology is also of critical importance for the ability of land reform to foster pro-poor growth. We know from the experiences of China and Vietnam that land reform by itself can have a major impact on productivity and incomes, in particular in economies with labor intensive farming and where land is a relatively scarce commodity.3 These effects are most likely to emerge if land is given in kind in clearly delineated plots to rural households. These factors drove the rapid gains in productivity in countries such as China and Vietnam and later in Albania. These documented results of land reform lead us to believe that the same factors should apply in Azerbaijan, Moldova and southern Kazakhstan. In labor intensive agricultural systems, such as Azerbaijan and Moldova, there are important equity benefits to land distribution as well, because employment in agriculture is typically nearly universal and the egalitarian distribution of land therefore creates widespread benefits to the rural, often poor, population. In less labor intensive agricultural systems, such as Bulgaria and northern Kazakhstan, the incentive gains of individual farming are still important, but economies of scale are also key. There are large efficiency costs to fragmentation of farm holdings and the lack of access to finance and capital technology of small-scale farming is more costly in such an environment. Hence, privatization of land by itself may not result in strong and widespread rural income growth. In the absence of mitigating factors, the privatization of farms in less labor intensive agricultural systems should also have different equity results. The potential gains from mechanization should induce privatized large farms to gain efficiencies by laying off surplus workers, as was the case in Central Europe. The lay-off of low skilled farm workers will cause extensive rural unemployment and increase rural poverty, unless there is either a strong social welfare system ­ as in some countries in Central Europe ­ or alternative employment. In countries such as the Czech Republic and Slovakia restitution worked relatively well, 3Rozelle and Swinnen (2004). vii because in these countries less people were still employed in agriculture and the countries were much richer. Bulgarian land restitution falls between the path of the `labor-intensive-land-distribution' model of poorer countries and the `capital-intensive-high-social-security' model of Central Europe. In rural areas restitution allocated land to older households, which were least able to start up large-scale family farms and which had few opportunities for alternative employment. Without significant welfare benefits or alternative employment, income and poverty problems of the rural population in Bulgaria were particularly bad. Hence, in such an environment the availability of alternative employment opportunities is crucial. In these conditions, the most dynamic and able migrated to the cities, leaving the countryside disproportionately populated by older and low skilled people. In many countries, including the Russian Federation, Ukraine and Kazakhstan, there are mitigating factors that often prevent privatized large farms from gaining efficiencies by laying-off surplus workers. These may be explicit or implicit state (central or local) policies to prevent rural unemployment, rent seeking by large farms that encourage them to maintain large numbers of employees, a sense of community obligation by management to maintain employment or soft budget constraints, to name a few. These policies are not absolute. There are corporate farms in each of these countries that have restructured, improved their performance, shed workers, and incorporated new capital and management, often as a result of being bought out or taken over by outside owners. However, we found no evidence in Kazakhstan of the widespread labor shedding that took place in Central European corporate farms, a key indicator of substantial farm restructuring. Northern Kazakhstan, therefore, provides a slightly different model of land reform than is found in Central Europe and Bulgaria. In Northern Kazakhstan there would be large efficiency costs to fragmented farms, because such farms would encounter significant problems related to access to finance, capital and marketing channels. These added difficulties in such an environment argue for the importance of larger farms that are vertically coordinated with processors and traders in order to ensure such access. In Kazakhstan the issue of scale economies is used to justify and support the maintenance of vertically coordinated corporate farms that are far larger than such considerations would merit many of which operate at a loss. An average corporate farm in Kazakhstan in 2002 was 12,000 hectares in size, far larger than the largest category of farms (by size) in the United States (798 hectares). Farms of such size would normally be expected to suffer from extreme diseconomies of scale connected with difficulties of governance. This hypothesis seems to be borne out by the profit performance of such farms. The subsidies available to such farms address the effects of poor performance rather than the causes. Moreover, they tend to create a problem of moral hazard that would not seem to improve performance. Raising the welfare of rural residents is about raising labor productivity, It is well known that there is a strong negative correlation between the portion of the labor force employed in agriculture and GDP and rural incomes. The "agricultural transition" is about how rural incomes and GDP increase as agricultural employment decreases. Survey data on disposition of land suggest that key factors in raising rural incomes are non-farm employment opportunities and rural pensions. Not only do these provide additional income to rural farming households, but they tend to reduce agricultural employment. viii Information on changes in income and non-income measures of well being of households in Azerbaijan suggests that households assess their well-being by considering more than income. For instance, Azerbaijan had the best sector performance of any of the countries considered. Yields improved, production increased and rural poverty fell. However, households were quite pessimistic (compared to other countries) as to changes in their well-being with only 18 percent of them believing that well-being had improved over the past three years. One key to this disparity is the substantial deterioration in rural services in Azerbaijan compared to urban areas. Another apparent reason is that fully two thirds of incomes in Azeri households derived from farming and only 11 percent from wage employment. This portion of income from farming is a considerably higher portion than that found in the other countries. This risk aversion may explain why households prefer to maintain employment in large farms, instead of becoming commercial farmers themselves. It is also why the creation of non-farm employment in rural areas is so important. . . . the predominant farming technology. . . The propensity of households to farm their land also appears to depend on the labor intensity of the farming environment. In labor intensive agricultural environments those households that farmed land received during land reform earned higher incomes. Thus, in Azerbaijan and Moldova most households farmed at least some of the land they received. In less labor intensive farming environments such as northern Kazakhstan or Bulgaria, however, pensions and non-farm income seem to play a greater role. In Kazakhstan, where those who did not farm land had large salary income that more than compensated for sales of agricultural products, families that used land actually had lower overall incomes on average. In Bulgaria pensioners could do nearly as well by collecting their pensions, and leasing out their land as by farming the land received from land restitution. We did not control for other factors in making this judgment, so it is not robust. However, it certainly suggests that rural pensions and non-farm employment opportunities are key factors for agricultural policy in these countries. . . . and rural services. In this survey of land reform and farm restructuring it has been shown that the deterioration of the collective farm system also implied a deterioration of rural public services. The renovation of these services depends critically on the establishment of financially viable local government. No country has solved the problem of public funding for local government. In general, although the experience of both developed and transition countries is that local rural services can not be supported by local taxes, no country has been able to develop the political will within the government to make rural development and maintenance of rural services a high priority. Certainly, this is an area where donors could assist in the set up of working local government institutions. However, the operation of local government is something that can not be carried out by donors. There needs to be a need felt within the government for development of this matter, something which seems to have yet to occur. Thus, raising the welfare of rural residents requires assistance from the government in the form of rural development, rural pensions and social support. In addition to ensuring an enabling environment for private agriculture, if the government is interested in raising the welfare of rural residents one of its roles should be to assist the ix transition from high employment, low wage agriculture to low employment, high wage agriculture. This can be done through rural development, rural pensions, social support for those shed from corporate farms and other social services. It could also be accomplished by assisting young people in acquiring skills for alternative employment. Legislation and procedures that appear gender neutral because they do not make a distinction between the rights of men and women may nevertheless affect men and women in very different ways, given how traditional gender relations and stereotypes affect access to information, resources, and power. Thus, legislation as well as administrative procedures for establishing rights may need to involve special outreach to women. . . . Female-headed households in each of the countries surveyed used less land, had lower perceived well-being and were more likely than male-headed households to believe that their well-being had deteriorated in the past three years. Though female-headed households owned about the same amount of land as male-headed households in all countries, they were likelier than male-headed households to rent out land, and on average, they used significantly less of the land received from privatization than did male headed households. It is not completely clear why these differences exist, but qualitative interviews suggest that although formal legislation and procedures are largely gender neutral in all four countries, women's access to information and legal recourse is substantially lower than men's. Likewise, female headed households may be less well-positioned to use land beyond the household plot for a combination of reasons: less labor-power, less access to heavy equipment, and heavier household responsibilities. . The deterioration of rural service provision has increased women's child and elder care responsibilities, thereby increasing their domestic workload and making it harder for them to enter the labor market. . . . Thus, if women are to benefit from growing opportunities in farm and off-farm opportunities, governments will have to pay attention to providing adequate social services, and thereby reducing some of the barriers that women, in particular, experience. The Bulgarian land reform and farm restructuring present a bit of an enigma. There are many positive factors that would seem to contribute to the success of land reform. Compared to the other three countries considered, Bulgarian indicators of overall governance as well as of complementary agricultural reform policies are good and improved sharply after 1997. The Bulgarian local government reform was the most thorough and most democratic of the four considered in this study. Despite these positive factors, the perceived level of well-being of rural households in Bulgaria was by far the lowest of the four countries surveyed, and a considerably higher portion of households in Bulgaria indicated that their level of well-being had deteriorated over the past three years. Bulgarian rural households seem to perceive their well-being to be significantly worse than in the other countries covered in this survey because land was restituted predominantly to older households who were ill-suited to farm it. This is partly because older households may not have the entrepreneurial abilities of younger households. But small household farms in Bulgaria in general face significant startup costs, because farming is relatively capital- intensive. Moreover, older household heads have another significant source of income, pensions, which may diminish their incentive to farm. For these reasons households overwhelmingly chose not to farm the land they received. Deterioration of rural services and x benefits and the deterioration of the sense of community add to the rather bleak perception of well-being of households in Bulgaria. Both agricultural and macroeconomic policies in Bulgaria most likely had the effect of exacerbating the difficulties felt by the rural population, by making growth in agricultural production and yields very difficult through 1998. Though caution should be used in attributing causality, it is difficult to escape the conclusion that policy failures bore much responsibility for the 40 percent fall in both GDP and agricultural production in Bulgaria after 1989. In 1998, Moldova achieved a political and institutional breakthrough that appeared to resolve the farm debt problem, dissolved former collective farms and distributed land and non-land assets to farm employees in a fair and transparent manner. It was hoped that resolving these issues would lead to production and efficiency increases that would raise the welfare of rural people. But despite implementing a decisive land reform shaped greatly by aid agencies, Moldovan agriculture has not shown the degree of success that might have been expected. Gross agricultural production fell through 2000, although it turned up in 2001 and 2002, after the completion of reform, along with GDP. Crop and livestock yields have been in a secular decline since 1989 or 1990. Our explanation of this enigma is that land reform, interpreted as the transfer of production from corporate to individual farms, had few immediate potential yield gains to exploit in Moldova. With so few gains to be made, it is not surprising that there has not been more little apparent improvement in productivity. For crops, yields in individual farms were only 21 percent higher than those in corporate farms over the entire period from 1990 to 2002. Although there appears to have been few potential immediate yield gains to be made, it is doubtful that crop yields would have improved without land reform. A naïve estimate of the course of crop yields in the absence of land reform amounts to a continued fall rather than a modest improvement. A possible underlying reason for the relatively small difference between individual and corporate farm performance is the continued poor enabling environment in Moldova for farming. Continued ad hoc intervention in markets by the government kept and keeps yields in both individual and corporate farms low. The improvement in yields and increase in agricultural production after 2000 came during a period of lessening of interventions. This changed in 2003 after a very damaging drought, with renewed interventions in grain markets accompanied by controls on processing margins for millers. Eight years after the beginning of agricultural reforms in Azerbaijan the results are beyond most people's expectations. Agricultural production has grown steadily since 1996, save for one year. Crop yields have also increased steadily and GAO has recovered to three quarters of its 1991 level. For a country in which rule of law, control of corruption, and regulatory quality have been low for many years it all seems difficult to explain. In fact, Azerbaijan seems to illustrate that overwhelming political will is often more effective in carrying out reform than the on-again, off-again reforms that come with a parliament divided between two opposing factions. Moreover, the single-minded "individualization" of Azerbaijani agriculture suggests that the Moldova and Bulgarian reforms, which resulted in a mix of corporate and individual farms, were truly formed of political compromise. Land reform in Azerbaijan aimed most decidedly at creating private, owner-operated farms, in xi contrast to the other three countries where this aim did not have the same weight. As a result, 96 percent of cultivated land was farmed in individual farms in 2002. Azerbaijan has also had very positive sector performance following land reform and farm restructuring. This is partly a result of the very large potential for yield improvements in performance in Azerbaijan from land reform, much larger than in Moldova or even Kazakhstan. However, the yield increases do not seem to have been derived solely from land redistribution. Private and corporate farm yields continued to rise even after land was redistributed. Despite this very good growth of agriculture, there have been few downstream improvements in processing in Azerbaijan leading to growth in food processing. Investment and contracting have been limited by the poor business environment and lack of regulatory policies and contract enforcement (World Bank, 2005). Good sector performance has also not translated into sizeable increases in the subjective well- being of farming households. Though farming households that use land they received under land reform seem to earn about 20 percent more than households that do not farm the land, farming households have few other sources of income but farming in Azerbaijan. This lack of income diversification in a country where farming is labor intensive means that the risk- adjusted income stream from farming in Azerbaijan is probably lower than it is in other countries where income is more diversified. The case of Azerbaijan also seems to illustrate the significance of governance in implementing rural reforms. Low levels of governance in Azerbaijan did not seem to prevent the proper implementation of land reform. The World Bank supplied needed technical guidance in the implementation of land reform, backed up by a government with political will. However, rural inhabitants in Azerbaijan have seen the most severe deterioration in rural public services of any of the countries surveyed, and attempts at organizing local government have been more difficult and taken longer in Azerbaijan than in Bulgaria or Moldova. This seems to indicate that low levels of governance present more problems for day to day maintenance of public services than for a one-time land reform, for which expertise can be imported. By most accounts, Kazakhstan's land reform has excessively emphasized preservation of large farms, many of which have been bought up by vertically integrated private grain companies (Esirkepov, 2001). Preservation of large farms resulted in maintenance of the extremely uneven allocation of land from Soviet times, while "share privatization" made implicit promises to farm employees about land distribution that were not kept. Kazakh officials maintain that the land reform has favored efficiency over equity in an effort to avoid the fragmentation of land ownership observed in other countries. However, the skewed distribution of land, it is argued, carries with it a skewed distribution of income, which will preserve rural poverty. It is therefore surprising to find that the perceived well-being of farmers in Kazakhstan exceeded greatly that in other countries studied. And the highest portion of households indicating that well-being had improved in the past three years were found in Kazakhstan. Moreover, production of crops and livestock has increased in Kazakhstan nearly every year since 1998, and rural farming households are more satisfied with rural public services than in other countries. Perhaps most surprising of all, 78 percent of agricultural production now originates in individual farms. What have the critics of land reform missed? xii As in the other countries surveyed, we can not separate out the contribution of land reform and farm restructuring to improvements in farm performance in Kazakhstan. Improvements in crop and livestock yields in Kazakhstan since 1993 seem to have been a consequence of a combination of factors, including movement of production to individual farms which also outperform corporate farms, rising GDP and agricultural prices and perhaps improvements in weather. Beyond the issue of performance, though, the Kazakhstan land reform and farm restructuring appears to have achieved some of what land reform has achieved in Moldova and Bulgaria without the dissolution of corporate farms. 78 percent of GAO was produced in individual (family and household) farms in 2002 in Kazakhstan. In Moldova 71 percent of GAO was produced in individual farms in 2002. 90 percent of livestock inventories were in individual farms in Kazakhstan in 2002, compared with 91 percent in Moldova and about 90 percent in Bulgaria. A bit less land was in individual farms in Kazakhstan in 2002--41 percent--compared to 56 percent in Moldova (2002) and Bulgaria (2000). At the same time, the Kazakh reform has maintained many of the features of the large farm system that made it unprofitable, but reduced rural dissatisfaction. Salaries constitute a higher portion of the income of rural farming households in Kazakhstan (46 percent) than in Moldova or Bulgaria. About half of this derives from employment in large farms, the other half from non-farm sources. Compare this with Moldova and Bulgaria, where 33 and 34 percent of income derives from salaries. Kazakhstan's large farms also maintain some of the rural service and social benefit functions that were formerly covered by collective farms, in contrast to Moldova and Bulgaria. The more important underlying reason, however, for positive perceptions of land reform may be Kazakhstan's oil boom, revenues from which helped fund for rural services and allowed the government to continue supporting unprofitable large farms. It also raised the overall wage level, so that although land reform deprived people of assets, they entered the labor market with relatively higher wages. The combination of two positive factors that ensure that farm households have access to salaries--rural development and maintenance of the large farm system--may provide some explanation of why Kazakh farming households did not rate the severely unequal distribution of land in Kazakhstan or by the lack of government decentralization as negatively as expected. Perceived well-being of Kazakh farming households appears to be positively correlated with the portion of salary income. Kazakh farming households note that the level of rural public services has improved since land reform, particularly supply of gas and electricity in rural areas. This positive factor is in stark contrast to the changes in rural services seen in Azerbaijan, Moldova and Bulgaria. Both the decline and the level of rural services in Azerbaijan is the worst of those considered here. While some rural municipal services have improved in Moldova, they have severely deteriorated in Bulgaria. There are considerable drawbacks to the course of land reform and farm restructuring in Kazakhstan. Nearly half of corporate farms remain unprofitable and the government supports corporate farms with subsidies and credits. This casts doubt on the government claim that maintaining large corporate farms stresses "efficiency" over "equity." Although the portion of unprofitable corporate farms in Kazakhstan is actually slightly less than in Moldova, in neither country has farm restructuring solved this problem of corporate farm profitability. Kazakhstan's corporate farms also seem distorted in ways that neither Bulgarian nor Moldovan farms are. In contrast to corporate farms in Bulgaria and Moldova, those in Northern Kazakhstan are larger than even the largest farms in the United States. A further xiii drawback to the Kazakh approach to land reform and farm restructuring has been that the enabling environment for agriculture seems to be supportive of large farms, though quite a bit less so for small farms. This fact is emphasized by the World Bank assessment that restructuring government and public institutions to serve the needs of private agriculture is still lacking in Kazakhstan (Figure 16). xiv INTRODUCTION Over the past decade the rural sector in nearly all the countries of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS) has undergone a shift from predominantly collective agriculture to more individualized agriculture. Over a ten year period, between 1990 and 2000, over 145 million hectares of land were transferred to private ownership. This transfer is considerably larger than previous land reforms, including Mexico's land reform (lasting nearly a century from 1917 to 1992 and transferring about 100 million hectares), Brazil's land reform (lasting 30 years and transferring 11 million hectares), the Japanese land reform (which transferred about 2 million hectares), as well as land reforms in Korea and Taiwan (which transferred 0.5 and 0.2 million hectares) (Deininger, 2003). Despite the significance of land reform in these countries, there are few comparative studies of how different policies have resulted in different apparent outcomes in the region.4 Though the dimensions of land reform are impressive and the changes many, land reform does not yet seem to have lived up to its potential in many countries of the region.5 There are at least two potential long-run benefits from distributive land reform and farm restructuring-- an improvement in farm production efficiency and improved access to land for poor rural inhabitants. Land reform can contribute to the efficiency of farm production through establishing secure individual property or use rights over land. Secure tenure rights can improve the investment climate in rural areas, improve access to credit for rural residents with land titles, increase demand for land and widen the scope for local tax revenues. These changes should foster growth of agricultural production. Land reform can increase access to land for poor rural inhabitants if distribution or restitution of land in rural areas is widespread. Access to land provides a social safety net in rural areas allowing rural residents to ensure their own food security. Furthermore, land distribution can provide rural inhabitants with entrepreneurial skills the wherewithal to become commercial farmers. Land reform can therefore contribute to poverty alleviation by supporting sustainable pro-poor growth in rural areas. In many countries of the region the contrast between these widely acknowledged potential benefits of land reform and rural realities could hardly appear wider. The past decade and a half has seen the largest fall in agricultural production, yields and rural employment on record in many of the countries of the region. Poverty rates in this part of the world rose greatly in 1990s, and for most of the countries rural poverty headcounts are higher in rural areas. Furthermore, the deterioration and then dissolution of collective and state farms was accompanied by a significant drop in rural public services. The contrast between these two pictures in many of the countries of this region have led many to question to what extent land reform itself has been responsible for these negative developments and why land reform does not appear to have fulfilled its promise of pro-poor growth in rural areas. There is therefore a great need for a critical review, a stocktaking, of land reform and farm restructuring to document what is known about the apparent effects of land reform and farm restructuring and to understand why land reform has not lived up to its potential in many of the countries of this region. 4Lerman, Csaki and Feder (2004) is perhaps the most recent study with an excellent bibliography. 5On the promise of land reform see Deininger (2003, 2005). 1 A stocktaking of land reform and farm restructuring must be realistic as to what it can achieve and what it can not. It can not offer a complete impact analysis of land reform policies, because of the difficulties of rigorously establishing causation. First, it is difficult to isolate the effects of land reform and farm restructuring from the effects of other policy changes and economic trends that took place in this period. Particularly in the early 1990s, inherited distortions of the previous system may have had more to do with observed economic declines and social difficulties than land reform and farm restructuring, which were introduced rather late in these countries. Second, the length and divisiveness of the political process of introducing land reform and farm restructuring and the implementation of complementary reforms also had critical consequences for the economic and social results of reforms. Generally, the longer and more acrimonious the reforms, the more likely they were to be obstructed by lawmakers, local elites or farming interests and the more likely the scope of complementary reforms was limited. Third, agricultural reforms and their effects should not be viewed in isolation from the rest of the economy. There have been important spillover effects from the rest of the economy that have constrained or benefited the performance of agriculture in this period. A stocktaking of land reform and farm restructuring can, however, offer a structured and comparative review of some key aspects of land reform and farm restructuring policies. It can document important differences in policies between countries and some of their immediate effects. It is much less reliable in establishing longer term harmful or beneficial effects of land reform. For example, a stocktaking can point out that the distribution of land in Azerbaijan had an immediate impact of increasing the average land holding of rural inhabitants by one hectare and caused the distribution of landholding to become significantly more equal in rural areas. However, it is much more difficult to attribute the subsequent growth of crop production exclusively to land distribution, because GDP in Azerbaijan increased at the same time. While a stocktaking recognizes the difficulties of causal arguments about land reform, this does not mean that it should not try to evaluate land reforms in each of the countries. In our opinion, the overall purpose of land reform was to improve farm performance leading to an increase in the well-being of the rural population. We utilize the growth in crop and livestock yields and labor productivity as overall indicators of changes in farm performance. We also analyze differences in farm performance in corporate and individual farms by comparing crop and livestock yields in these two sectors over time and by analyzing productivity measures in family and corporate farms at a single point in time using survey data. Last, we analyze corporate farm performance over time by comparing official statistics on profitability. Each of these measures has limitations, and it may be argued that none of these measures is adequate for understanding the extent of farm restructuring. So, we have tried to be conservative in our interpretations of the data. For the measurement of the well-being of rural households we rely on subjective perceptions of household well-being and changes in well- being gathered from World Bank household surveys in each of the four countries covered in this study. This paper presents such a stocktaking of land reform and farm restructuring in four countries of the Europe and Central Asia region that have had particular difficulties in land reform, farm restructuring, farm performance or rural poverty. It is organized by case studies, each of which is designed to analyze a central conundrum about land reform and farm restructuring in an individual country. In these countries, the current apparent outcomes following land reform and farm restructuring are different, though it is not always clear why. We start with 2 two countries, Bulgaria and Moldova, where the apparent outcomes seem to be poor, though the reforms themselves appear to have been good. We then address two other cases, Azerbaijan and Kazakhstan, where agrarian reforms seem to have been carried out poorly or where there seems to have been little capacity to implement them competently, but where agricultural productivity and the subjective well-being of rural residents suggest a relatively positive outcome. Each case study is also organized to answer basic questions of land reform and farm restructuring such as the context of land reform, the design and implementation of land reform and farm restructuring policies, the portion of land and livestock inventories in individual (owner-operated) farms, the disposition of land by farming households, the development of local government capacity to take on the public service functions formerly handled by collective and state farms, growth in production and productivity of farms, farming household perceptions of their well-being and changes in rural public services, social benefits and community life. Much of the information presented in this review derives from farm and household surveys conducted in each of the four countries in 2003. The surveys were designed to provide information that would be comparable across countries. The household surveys covered from 500 to 700 households in each country, and the farm enterprise surveys covered 60 to 200 family and corporate farms. Surveys were supplemented by individual and focus group discussions. More information on survey methodology, terminology and the limitations of the information derived is contained in Annex II. Box 1: Agricultural producer terminology For the purposes of this study, agricultural producers fall into three categories. The first is that of so- called corporate farms. These farms are either descendents of state and collective farms or farms formed after their break-up. After 1991 in Bulgaria, 1993 in Kazakhstan, 1995 in Azerbaijan and 1993 in Moldova, corporate farms became a mixture of reformed state and collective farms, joint stock companies, limited liability companies, partnerships, closed or open corporations and cooperatives. The second category, "individual farms," consists of two sub-categories--family and household farms. In order to be considered a family farm a farm had to be registered. The difference between household and family farms was based solely on registration, rather than on the size of the farm. Household farms were defined as rural households engaged in farming without being formally registered. 3 With good overall prospects, good agricultural policy and governance indicators, why are Bulgarian rural households so badly off? The Bulgarian land reform and farm restructuring present a bit of an enigma. There are many positive factors that would seem to contribute to the success of land reform. Compared to the other three countries considered, Bulgarian indicators of overall governance as well as of complementary agricultural reform policies are good and improved sharply after 1997. The Bulgarian local government reform was the most thorough and most democratic of the four considered in this study. Despite these positive factors, the perceived level of well-being of rural households in Bulgaria was by far the lowest of the four countries surveyed, and a considerably higher portion of households in Bulgaria indicated that their level of well-being had deteriorated over the past three years. How can this be explained? The context of land reform The policy context for agriculture in Bulgaria can be separated into two distinct periods, before 1998 and after. Agricultural and macro policies between 1991 and 1998 heavily taxed agriculture after many years of subsidies. Producer support as measured by the percentage Producer Support Estimate (PSE) was -40 in 1991 and was negative each year until 1998 (OECD, 2002). The primary reason for this type of implicit taxation of agriculture was that domestic farm gate prices for agricultural products were controlled and significantly below world prices, indicated by nominal protection coefficients for agricultural producers of less than unity. Taxation of agriculture had a negative effect on purchases of agricultural inputs. Fertilizer consumption per ha of sown and permanent cropland in Bulgaria fell from a peak of 220 kg per ha (1988) to just under 120 kg per ha in 1991 and just over 20 kg per hectare in 1995 (Sedik, 2004). The Bulgarian macro environment was quite unstable through 1998 with inflation at over 50 percent per year in each of these years starting in 1991. Growth in GDP was also negative, turning positive only in 1998. The Bulgarian government attempted to offset the effects of rising prices for consumers by imposing price controls on food and agricultural commodities, as well as by export duties on cereals. The new government organized after the 1997 parliamentary elections stabilized the currency, liberalized prices and trade and pushed through many structural reforms in the Bulgarian economy. Starting in 1998, percentage PSEs turned slightly positive (+1 to +3) and nominal protection coefficients which measure the ratio of domestic to world commodity prices (at the farm gate) were approximately 1, indicating policy neutrality. The effect of these pre 1998 agricultural and macroeconomic policies was to depress agricultural production. It is difficult to imagine growth in agricultural production when domestically grown commodities could be sold for between 60 and 75 percent of world prices and GDP was continually falling. Both crop and livestock production in Bulgaria began to fall before the beginning of land restitution along with Gross Domestic Product (GDP) and continued to do so until 1999, with the exception of 1994 and 1995 (Figure 2). 4 The change in agrarian reform policies of 1998 can be seen in the indices compiled by the World Bank on the status of agrarian reforms. These indices measure the status of agrarian reforms in the Bulgarian economy in five key areas, with each index ranging from 1 (centrally planned economy) to 10 (market economy) (Figure1). Between 1997 and 1999 the sum of the reform indices jumped by 10 points with the main improvements in the areas other than land reform. Figure 1: Bulgaria: Status of agrarian reforms 50 45 40 8 8 8 9 ax=50) 35 7 m( 6 usta 30 6 7 7 7 7 st rmo 25 5 5 ref 8 8 8 20 4 9 9 7 Bank drlo 15 5 8 8 8 W 8 8 8 10 7 5 8 9 9 9 8 8 6 0 1997 1998 1999 2000 2001 2002 2003 Year Price and market Land reform Agro processing Rural finance Institutional Note: The indices measure the status of agrarian reforms in five key areas, with each index ranging from 1 (centrally planned economy) to 10 (completed market reforms). For a detailed explanation of ratings, see Csaki and Zuschlag (2004). Source: World Bank. The design and implementation of land reform and agricultural production It would be difficult to claim that the design of the land reform in Bulgaria or its implementation was seriously flawed compared to other countries. In Bulgaria, land was to be restituted to owners of land as defined by the 1946 Agrarian Reform Law or their heirs. Though Bulgaria is the only country considered in this study that chose restitution as the method of privatizing socialized land, most of the countries of Central and East Europe chose the same method. In contrast to some of the Central European countries, though, in Bulgaria land reform was very controversial and its cause advanced only through considerable political struggle between the Bulgarian Socialist Party (BSP) and the Union of Democratic Forces (UDF). The original law was amended more than 25 times between 1991 and 2000, causing considerable confusion in the process.6 In countries such as the Czech Republic and Slovakia restitution worked relatively well. Restitution created strong land rights, soft budget constraints were eliminated and farms were 6 See Kopeva et al (2002) and Swinnen (1997) for details. 5 forced to restructure, including by shedding labor. These farms gained labor efficiency and laid-off workers were protected by relatively generous pension and social security systems or were able to find employment in other sectors, including an emerging rural service sector. These countries differ from Bulgaria in that fewer people are employed in agriculture and the GDP per capita is much higher. Only after April 1997, when the UDF achieved a majority in Parliament, was the government able to stabilize the economy and strengthen and further structural reforms, including those in agriculture. However, most restitution took place during the period of political struggle, which shaped the nature of the entire reform. By 1998, almost 80% of land titles had been allocated, and the process was largely completed by 1999. On general matters of institutional governance Bulgaria scores well--the best of the four countries considered here, though not quite as well as the most advanced country of the new European Union (EU) East European states, the Czech Republic (Annex I Table 1). But "government effectiveness" in Bulgaria was low until 1998, because of the political struggle between the socialists and UDF through that year. Figure 2: GDP, crop and livestock production and restitution of land in Bulgaria, 1985- 2002 140 140 Restitution of land ) 120 120 (% s mr 100 100 0) 10=5891( Begin agrarian falaudivid 80 80 in reforms in dn s la ceidnI 60 60 First land deta legislation 40 40 20 20 ivltucfotnecreP 0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Individual land Crops Livestock GDP Source: Statistical yearbooks. The impact of political struggles in Bulgaria can be seen in Figure 2 in the restitution of land bar graph. The jump in the portion of land in individual farms between 1993 and 1994 was achieved as a result of policy changes by the UDF. After the Bulgarian Communist Party gained a majority in December 1994, the portion of land in individual farms stagnated. After April 1997, with parliamentary control back in the hands of the UDF, the ratio began to rise again. Both crop and livestock production in Bulgaria began to fall before the beginning of land restitution along with Gross Domestic Product (GDP) (Figure 2). Though livestock 6 production seems to have begun a slight recovery in 1998, following the recovery in GDP, crop production fell overall through 2000. Local government reforms and public service funding Bulgaria, in part motivated by the requirements of EU accession, has moved the farthest of the countries considered here to decentralize decision making within the government. Bulgaria's 263 municipalities are governed by municipal councils whose members are directly elected for four-year terms and executive power is vested in an elected mayor. Municipalities are to provide a range of social and municipal services, many of which had previously been supported by state farm enterprises. These services (including education, health care, municipal sanitation, social assistance, public works and utilities) are to be financed through a complex system of subsidies and tax sharing. Municipal government in Bulgaria is chronically short of resources with which to fund local public services. Moreover, the gap between mandated services and available resources continues to undercut the autonomy of local governments and their ability to respond to constituents' service needs. In the absence of strong independent institutions and adequate service, personal relationships, contacts and initiatives often direct service delivery.7 Disposition of land received In Bulgaria, as in many other CEE countries, restitution resulted in a significant portion of land being leased out to new cooperatives or joint stock companies. Under the restitution law recipients were allowed to use the land themselves, lease or sell their land to newly formed corporate farms (primarily cooperatives, but also joint stock companies) or to private persons. In 2000, only 56 percent of cultivated land was in individual (owner-operated) farms (Figure 2). Rural households that received restituted land in Bulgaria put it to different uses than in the other (CIS) countries surveyed. Comparatively few households (38%) used it themselves (Annex I Table 3). Most preferred to lease it out, either to large farms or to cooperatives. Over 40 % of rural households in Bulgaria interviewed in the World Bank survey leased out land. A similar portion of respondent households leased out land in Moldova, a figure far higher than in Kazakhstan or Azerbaijan (Annex I Table 3). Restitution according to the 1946 Agrarian Reform Law meant that land was granted predominantly to the older population. In rural areas, where nearly a third of the population is of retirement age, land ownership became concentrated with older people, with important implications for entrepreneurship (Annex I Table 2). Only 5 percent of the heads of households receiving land in the Bulgarian household survey sample were younger than 40 years of age. Restitution also meant that the land distribution in Bulgaria was relatively limited compared to CIS countries, which distributed land much more widely. Only 60 % of rural households interviewed in the World Bank survey actually received land (Annex I Table 3). In Azerbaijan and Moldova, nearly all respondent households received land. Restitution also resulted in considerable abandonment of land ­ a 2003 survey of three regions in Bulgaria found that almost 40 percent of households had abandoned at least one parcel, averaging one hectare (Noev, Swinnen and Vranken, 2003). However, one important 7Shahriari (2003). 7 reason for abandoning the parcels turned out to be poor land quality. Another reason, however, is the aged rural population without interest in cultivating or renting land, combined with poorly defined property rights that have retarded development of an efficient land market and surely reduced overall sector performance. Unlike in Moldova and Azerbaijan, in Bulgaria the involvement of rural households in farming other than for subsistence is rather limited. Of the entire sample of rural households surveyed only 23% both received land and used it themselves. The reluctance of households in Bulgaria to farm restituted land may make sense. It is true that households that received land through restitution had higher monthly per capita expenditures than those that did not receive land. However, the difference between households that used land received and those that did not is small (Table 1). Households that used land reported higher well-being, and were more likely to report that their well-being had improved over the previous 3 years. However, Table 1 seems to indicate that a pensioner family might do nearly as well by collecting a pension and leasing out land, rather than farming it. Certainly, the profile in Table 1 is not conclusive, because it does not isolate the effect of land use from other factors, as could be done in regression analysis. However, it is not clear which way causality runs and the functional form of such a regression would be difficult to define with certainty. Though relatively few rural households received restituted land and fewer still chose to farm the land they received, semi-subsistence farming is widespread in rural Bulgaria using predominantly non-restituted land. A World Bank survey of rural development needs found that 69 percent of rural households engage in farming, typically cultivating less than 0.5 hectares with household labor. Few households have evolved into commercial farms in the past few years (World Bank, Bulgaria: Survey of Rural Development Needs, 2004). Table 1: Monthly per capita expenditure, perceived well-being, and income composition of surveyed households that use / do not use land received during land reform Households that received land through Households that did privatization not receive land Using land Not using land through privatization received through received through privatization privatization Monthly per capita expenditure 120.6 114.1 90.5 (local currency) (BGL) (BGL) (BGL) Perceived well-being (% of 10.4 5.9 3.3 households rating today's well- being as high or very high) % of households indicating that 17.8 8.1 *** 7.1 well-being improved in last 3 years Percent in total income Total salary from wage 31.3 32.1 37.1 employment (cash / in kind) Value of farm production 19.2 7.9 *** 4.0 consumed in the family Sales of farm products 11.5 2.6 *** 3.3 Rent/lease payments 1.0 7.3 *** 0.5 received (for land and assets) Total revenue from other 2.5 2.5 2.8 private non-farm business 8 Pensions 26.1 41.1 *** 26.9 Social assistance 2.4 2.9 19.0 Gifts and remittances 1.3 2.0 3.0 Other 4.0 1.6 *** 3.1 Notes: Asterisks mark significant differences between households that use land they received through privatization and households that do not use land that they received through privatization. ***, **, * differences are significant at 1%, 5%, 10% significance level. Source: World Bank survey of farms (2003). Economic performance of farms The economic performance of farms in Bulgaria differs greatly depending on whether one considers crop or livestock sectors (Figure 3). Livestock yields have more than doubled from 1991 to 2002, while crop yields and labor productivity have fallen quite rapidly from 1989 to 1993. After 1993 crop and labor productivity have been relatively steady. The large increase in livestock yields appears to be related to the movement of livestock from corporate to owner-operated farms. By the end of 2001, 88 percent of cattle, 90 percent of cows, 95 percent of sheep and 100 percent of goats were in farms owned and run by physical persons (Ministry of Agriculture and Forestry of Bulgaria, 2002). Figure 3: Indices of crop and livestock yields and agricultural labor productivity in Bulgaria, 1985-2003 Restitution of land 200 150 985=100)1( 100 Index 50 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Labor Crops Livestock Source: Statistical yearbooks. Though one must be careful about using agricultural labor (and labor productivity) information because estimates of agricultural labor are notoriously difficult and subject to changes in definition, it is notable that in Bulgaria there have not been the steep decreases in agricultural labor seen in such countries as Estonia, the Czech and Slovak Republics and Hungary (Annex I Table 4). This suggests that labor shedding in corporate farms, normally a 9 necessary part of farm restructuring and vital to their competitiveness, has yet to occur in Bulgaria. Information on the individual and corporate farming sectors in Bulgaria is very difficult to come by. The Ministry of Agriculture began Farm Structure Surveys only in 2000/2001. A comparison between corporate and family farms based on the World Bank survey in Bulgaria shows that family farms tend to perform better on a per hectare basis with higher output and profit per hectare (Table 2). Corporate farms have higher labor productivity. Overall total factor productivity (the ratio of the value of output to total costs) was higher on corporate farms. Box 2: Crop and livestock yield indices To track crop yield changes in the countries of this study we use an index of crop yields using current year (2002) weights derived from the distribution of cultivated area among crops. Current year weights are used because they probably better reflect the distribution of land area under market conditions. In order to make the indices more comparable, a subset of crops raised in each country was chosen for the index. The crops used in the index cover 83, 85 and 95 percent of the area of sown and permanent crops in Kazakhstan, Azerbaijan and Moldova in 2002. The index leaves out various types of animal feed crops. To track livestock yield changes we use an indicator of the efficiency of meat production. For this purpose an index of meat production per inventory animal (using end of year stock figures) was constructed. This index can be thought of a rough indicator of gross return to the grain cost of maintaining capital stock. The numerator is a measure of meat production in kilograms, while the denominator is a measure of animal inventories in cow terms, weighted according to the relative grain consumption of each animal. For instance, if cows and horses receive a weight of 1.0, the weight for cattle is 0.6, sheep and goats, 0.1 and poultry receive a weight of 0.02. This is not a perfect indicator of efficiency by any means, but it has the advantage that it can be calculated for each of the CIS countries. The drawbacks of this indicator are evident during periods of large declines in inventories of corporate farms, indicating sizeable transfers to individual farms. During these periods meat production by corporate farms continues its slow decline, but inventories decline rapidly. Thus, it appears that corporate farm meat production efficiency jumps.8 This is because livestock inventories in the denominator, measured at the end of the year, reflect the transfer, while meat output does not yet. Table 2: Productivity measures for surveyed farms by type in Bulgaria TFP Labor productivity Land productivity Farm type N Output / total costs Output* Profit* Output* /ha Profit* /AWU /AWU /ha All farms 57 4.9 24.0 10.0 1.7 0.70 Family farms 23 3.1 9.1 4.5 3.4 1.26 Corporate farms 34 6.2 34.3 15.1 0.5 0.19 * 1000 LCU 8 Another difference between land and livestock distribution in the CIS countries is that animals could be exported. In the early 1990s corporate farms appear to have exported large quantities of livestock. The evidence for this is to be found in the large reductions in livestock inventories that were not transferred to individual farms. If this reduction in inventories signified distress slaughter, one would expect a temporary increase in meat production. However, there is no evidence of increased meat production in these periods. This phenomenon was most pronounced in Kazakhstan, where corporate farms appear to have exported the equivalent of 2 million cows per year from 1994 to 1996. 10 Notes: AWU=average work units; LCU=local currency units. TFP is total factor productivity, represented by the ratio of the value of agricultural production to total costs. Indicators that are statistically different at the 20% or better level are in bold italics. Source: World Bank survey of farms (2003). It is difficult to derive conclusions from these two figures, because it is not clear whether these productivity differences result from differences in scale or organizational form. In the World Bank survey, family farms were concentrated in the smaller size categories, while corporate farms were predominantly large. In most countries surveyed, including Bulgaria, labor productivity (measured as output per average work unit) varied positively with the size of farm, while output per hectare varied negatively with farm size (Annex I Table 5). Small farms, whether corporate or family, have lower labor productivity, but they use land more efficiently. This indicates the familiar labor-land tradeoff as farm size increases, regardless of organizational form. There seem to be productivity advantages to larger (200 to 500 hectare) farms in Bulgaria (Annex I Table 5). Though the sample size is quite small, farms in this size category and larger have higher TFP, output per hectare and output per labor unit, than smaller farms. One such advantage may be the less labor intensive nature of farming in Bulgaria. The pre-reform ratios of agricultural labor per hectare in Bulgaria and Kazakhstan were 0.13 and 0.008, while those in Azerbaijan and Moldova, where farming is more labor intensive, were 0.20 and 0.27 (Macours and Swinnen, 2002). Less labor intensive agriculture means that there may be significant start up costs for smaller farmers, with the result that larger farms may have higher productivity. Such capital intensive farming is typical in areas where field crops such as wheat and oilseeds are grown widely. Well-being of rural households Of the four countries surveyed, Bulgarian households ranked their well-being lowest by far (Annex I Table 6). Nearly 70 percent rated their current level of well-being low, while in the three other countries surveyed, only 20-35 percent of households were so pessimistic. Only 10 percent of Bulgarian households believed that their well-being had improved over the past 3 years, compared to 18-36 percent of households in other countries. Bulgarian household pessimism extended to perceptions of the enabling environment as well. Bulgarian households rated the enabling environment for farming more difficult than did households in other countries. The differences between ratings appears to be most pronounced for marketing of agricultural produce, access to veterinary services, access to pasture land and access to loans for investments. Box 3: Perceptions of intermediaries by small and large farmers in Bulgaria Small Bulgarian farmers felt that middlemen (intermediaries) were forcing small producers out of the market by pressuring them not to sell directly to processors, even using physical violence for this purpose. Larger farmers, however, found intermediaries useful for providing otherwise scarce pricing information, and negotiating large contracts with the processors, thereby providing them with some security. Small farmers in Dobrich alleged that the local state owned enterprise paid 0.16 BGL per kg. for wheat the previous year, but subcontracted two companies to buy it directly from the farmers. The companies offered the farmers only 0.10 BGL per kg. Farmers who tried to bypass middlemen by bringing their trucks directly to the storage facilities to sell their grain were beaten. Although one farmer hired bodyguards and passed the barricades, the state enterprise refused to purchase his wheat. Source: Focus group discussions 11 It is not clear whether Bulgarian pessimism about their lot is the result or cause of their ratings of their enabling environment. Both across countries and within countries there is a strong correlation between perceptions of the enabling environment for farming and perceived well-being of rural households. Households that perceive their well-being as high rank their enabling environment for farming consistently better than households in the low well-being group. Households with a lower perceived well-being have lower incomes and consider the enabling environment for farming worse. Comparatively low household perceptions of well-being in Bulgaria may reflect the significantly more capital-intensive nature of farming in Bulgaria as compared to Moldova and Azerbaijan. Whereas in countries (or regions) where agriculture is more labor-intensive the start up costs of farming are comparatively small, in more capital-intensive farming countries, such as Bulgaria or (northern) Kazakhstan, small (and new) farmers are at a significant comparative disadvantage. Larger startup costs imply that household farms, which tend to be small, are at a disadvantage compared to larger scale (family or corporate) farms. Larger scale farms may have better access to farm machinery, finance and other inputs associated with scale. This hypothesis may be supported by the comparatively more pessimistic views of the enabling environment in Bulgarian households compared to enterprises (family and corporate farms) in Bulgaria, when compared to other countries surveyed (Annex I Table 7). Enterprises in all four countries surveyed rated their enabling environment better than households. However, whereas the enabling environment was rated as only 7 percent better by enterprises in Moldova and Kazakhstan and 40 percent better in Azerbaijan, in Bulgaria enterprises rated their enabling environment 50 percent better. These differences were even more pronounced in ratings of access to loans for farm investments and access to agricultural equipment. Another explanation for the greater pessimism of Bulgarian households may lie in the greater age of household heads. Pensioners may find more capital intensive farming more difficult because of the greater startup costs. They also may have less incentive to farm land, since they have another income source. The structure of incomes of surveyed households in Bulgaria compared to the other countries in the survey illustrates the importance of pensions there (Annex I Table 8). Whereas pensions accounted for only 14 to 23 percent of household income in the other countries, in Bulgaria they accounted for 32 percent of household income, the second largest income source. A comparison between households that reported high overall well-being and those that reported low overall well-being points to important differences (Annex I Table 9). Bulgarian households that reported higher overall well-being tended to have younger and better educated household heads. Such households were also overwhelmingly Bulgarian, rather than from an ethnic minority. High well-being households also had a (statistically) significantly higher portion of male heads. Low well-being household heads were older, less educated and more likely to be of non-Bulgarian ethnicity (primarily Roma or Turk). 12 Rural services, social benefits and community life The inability of local governments to provide for rural public services and social benefits had a significant impact on how Bulgarian households rated the provision of rural services (electricity, drinking water and telephone access) and social benefits. Bulgarian households believe that the level of these services (except gas) has deteriorated since land restitution, (Annex I Table 12). However, the absolute level of satisfaction with rural services (except for gas) is generally higher than in other countries. Social benefits, such as compensation for price increases, subsidies for education and utilities and public transportation, have all deteriorated in the opinion of rural households (Annex I Table 13). Medical services have deteriorated greatly, while pensions (while still low compared to average salaries) have significantly increased and heating fuel subsidies have improved. Of course, more limited access to social benefits is to be expected, since social benefits are usually subsidies and part of the purpose of reform was to limit social subsidies that are fiscally unsustainable. Bulgarian households believe that community life has significantly deteriorated since land restitution (Annex I Table 14), leading to diminished trust and social cohesion. Among the studied countries, Bulgarian respondents evinced the greatest mistrust toward other members of their community (particularly those from the Roma minority), and the least inclination to place trust in traditional leaders. Alcohol use among adults and youth, and the level of crime and domestic abuse have all increased in the opinion of households. As compared to male headed households, female-headed households were likelier to feel their well-being had deteriorated in the previous three years (Annex I Figure 1). At the same time, informal interviews found a greater degree of gender equality within the household. This may be attributed partly to the high degree of cooperation required for survival in conditions of serious poverty, and partly to the increasing importance of family relations as social relations break down. The following comments on the level of depression, distrust, and sense of abandonment were typical: Box 4. Perceptions about community relationships "We get together for coffee and a cigarette, but all we ever talk about are our money problems so it is like an epidemic depression. People trust each other less than before. We trust our own family, and we all stay to ourselves." "When I came here with my husband 40 years ago there was a very active social life...everyone was singing and dancing...doing traditional activities. Now it is all gone. The elders are too old and the youth are leaving. There are streets in town where 3 or 4 houses in a row are empty. There are no people." "We used to trust everyone...neighbors would lend each other money and equipment and trust people to give it back...not today. Trust has been lost." Source: Focus group discussions and household interviews Heavy migration from rural areas is both a result and perhaps a cause of these feelings. Young people and those with higher education in particular leave the countryside more often than others. In contrast to countries from which people leave to earn money but plan to return (as in Moldova), interviewed Bulgarians consistently stated their intention to leave 13 permanently with their families. An interviewed municipal economic development officer noted that 90 percent of students who left to study did not return. Conclusions Bulgarian rural households seem to perceive their well-being to be significantly worse than in the other countries covered in this survey because land was restituted predominantly to older households who were ill-suited to farm it. This is partly because older households may not have the entrepreneurial abilities of younger households. But small household farms in Bulgaria in general face significant startup costs, because farming is relatively capital- intensive. Moreover, older household heads have another significant source of income, pensions, which may diminish their incentive to farm. For these reasons households overwhelmingly chose not to farm the land they received. Deterioration of rural services and benefits and the deterioration of the sense of community add to the rather bleak perception of well-being of households in Bulgaria. Both agricultural and macroeconomic policies in Bulgaria most likely had the effect of exacerbating the difficulties felt by the rural population, by making growth in agricultural production and yields very difficult through 1998. Though caution should be used in attributing causality, it is difficult to escape the conclusion that policy failures bore much responsibility for the 40 percent fall in both GDP and agricultural production in Bulgaria after 1989. The peculiarities of land restitution in Bulgaria resulted in a structure of land use where 44 percent of land is cultivated by reformed cooperatives and joint stock companies. Despite the fact that effective land reforms and farm restructuring started early in Bulgaria, these farms do not seem to have undergone the labor shedding found in other Central and East European countries so vital for competitiveness. Labor shedding in other Central and East European countries allowed farms to reduce labor costs and raise expenditures on other inputs, increasing crop yields. This may explain part of the persistent stagnation in crop yields in Bulgaria, while livestock yields (nearly exclusively on individual farms) have risen dramatically. There are certainly advantages to the structure of land use in Bulgaria. Compared to Romania and Albania, where land ownership and use are highly fragmented, leasing allows land to be cultivated by larger farms that are better suited to the capital intensive farming conditions in Bulgaria. Landowners, who are predominantly older (at least in rural areas), receive lease payments, though these are small. Pensions are a critical factor in encouraging the redistribution of land use to larger scale farms. At the same time, disused, fragmented plots constitute an impediment to a more vibrant land rental market. Although farming conditions in Bulgaria seem to favor larger scale farms, there is little evidence by which to evaluate the performance of Bulgarian corporate farms compared to owner-operated farms of similar scale. Though the total factor productivity of Bulgarian corporate farms in the World Bank survey was significantly higher than for family farms, it is unclear whether this difference is due to scale effects, organizational form, possible under- reporting. Moreover, information on the individual (owner-operated) and corporate farm sectors in Bulgaria is very difficult to come by. 14 With a well-designed land reform shaped greatly by donors, why have farms in Moldova not performed better? In 1998, Moldova achieved a political and institutional breakthrough that appeared to resolve the farm debt problem, dissolved former collective farms and distributed land and non-land assets to farm employees in a fair and transparent manner. It was hoped that resolving these issues would lead to production and efficiency increases that would raise the welfare of rural people. Initial changes were positive: gross agricultural production had fallen through 2000, but the trend changed in 2001 and 2002, along with GDP. If not for the 2003 drought, GDP would have further improved. Yet despite implementing a decisive land reform shaped greatly by aid agencies, why have positive effects on Moldovan agriculture been more limited than expected? The context of land reform The environment for agriculture in Moldova was and is made difficult by two key policy factors. First, the macroeconomic environment was quite poor throughout the 1990s, with inflation from 300 to 1200 percent per year from 1992-94. Though inflation was brought down to 30 percent per year in 1995, GDP fell every year from 1992 to 1999, except for 1997. This made the fall in GDP in Moldova one of the longest and deepest of the CIS countries. Between 1985 and 1999 GDP fell nearly 70 percent and began growing only in 2000. Second, the government enabling environment for agriculture producers was and is extraordinarily poor. The World Bank indices of reform status indicate that the government of Moldova has not taken steps toward restructuring government and public institutions to serve the needs of private agriculture (Figure 4). On the contrary, the government regularly intervenes in domestic and export markets for agricultural commodities and seems intent on establishing new regulatory bodies to run the sector. Bread and flour prices were liberalized in 1996, but many non-tariff intra- and foreign controls on trade in agricultural products remain. The government maintains state procurement for grain and in bad harvest years (such as 2003) intervenes in commodity markets on an ad hoc basis. The government of Moldova compounded these difficult conditions for agricultural production by maintaining farm share privatization for a long period, thus allowing for the wholesale stripping of assets from privatized farms. The government continues to detract from the enabling environment by proposing the renewed formation of production cooperatives and a new Land Code, raising doubts about the security of landowner property rights. The generally poor enabling environment in agriculture is indicated by the relatively low scores on reform status, compared with Bulgaria (30 vs. 40 in 2003). The poor enabling environment is quite significant for GDP, because agricultural production accounted for between 40 and 50 percent of GDP in this period. The effects of these agricultural and macroeconomic policies were unstable and low returns to the production of agricultural commodities and a sharp drop in use of agricultural inputs. Most farm gate prices after stabilization in 1995 were quite a bit less than export prices, probably attesting to barriers to trade internally and for export. The ratio of producer to export prices for cereals, maize, sunflower seeds, grapes, fruits, vegetables and tobacco varied from 25% to 100% between 1994 and 2000.9 Though the ratio of farm gate to export prices 9These ratios are calculated from unadjusted producer farm gate and fob export prices. They do not account for transportation, handling and storage costs between the farm gate and the border. 15 generally rose from 1995 to 2000, the ratio in 1999 for sunflower seeds, for example, was only 0.7. Second, the end of the central planning distribution system led to an immediate fall in farm use of agricultural inputs. Use of fertilizer per hectare in Moldova fell from just over 200 kg per hectare to 61 in 1992 and 1 in 1999 (Sedik, 2004). With continued falls in agricultural input use, highly unstable returns, falling GDP and uncertain property rights it is difficult to imagine robust growth in agricultural production in Moldova. In fact, crop production fell through 1999 and livestock production through 2001 (Figure 5). Figure 4: Moldova: Status of agrarian reforms 50 45 40 ax=50) 35 m( usta 30 5 5 4 st 4 5 4 4 rmo 25 5 6 5 5 6 7 7 ref 20 7 6 Bank 7 6 6 6 drlo 15 6 W 7 8 10 6 7 7 7 7 5 7 8 7 7 7 7 6 0 1997 1998 1999 2000 2001 2002 2003 Year Price and market Land reform Agro processing Rural finance Institutional Note: The indices measure the status of agrarian reforms in five key areas, with each index ranging from 1 (centrally planned economy) to 10 (completed market reforms). Source: World Bank. The design and implementation of land reform and agricultural production Though the Moldovan land privatization formally began in 1991, the large scale distribution of physical plots of land and the dissolution of collective farms did not begin until 1998. The Moldovan Land Code of 1991 envisaged a two-stage land privatization process (Muravschi, et al, 2002). In the first stage, the village land commission was to determine land shares (in hectares) for each eligible recipient. Land titles securing the holder's right to the land share were to be issued by mayors' offices. The second stage, initiated only in response to a request from a recipient, was the distribution of physical plots to those wishing to exit from the collective or state farm. During the first stage of farm "share privatization," assets were stripped from large farms and production fell continuously (Figures 5 and 6). Share privatization had a number of 16 drawbacks, the most significant of which were that (1) it did not sufficiently encourage large farms to reduce costs of production (i.e., share privatization usually resulted in only "changing the sign on the door"), (2) it did not change the soft budget constraint implicit in government policies toward the farms, (3) nor did it resolve the barriers to exit from collective or state farms. Neither farm directors nor collectives were generally in favor of allowing their employees to leave the farm. Moreover, many details of the process of exit (allocation of land and property shares, the methodology for identifying concrete plots of land and division of large farm assets) were worked out only years after the initial decrees authorizing farm exit. The generally far less favorable conditions for private farmers in matters of access to capital, inputs and markets compared to conditions for agricultural enterprises dissuaded many from exiting former collective and state farms. This imbalance resulted from state agricultural policies that supported agricultural enterprises with subsidies, state and bank credits, the authority to "borrow" from their employees through non-payment of wages or from members through low payment of leases, write-offs or rescheduling of state and bank debt, favorable marketing deals, etc. Finally, local executive authorities had great influence over the implementation of in-kind privatization of farms by design, and they often used this control to effectively slow or stop in-kind privatization that was tantamount to dissolution of farms under their authority. Figure 5: GDP, crop production and portion of land in individual farms in Moldova, 1985-2002 140 140 120 120 ) %( Farm "share privatization" Land distribution rmsaf 100 100 alud 0) 10=58 80 80 indivi in (19 s land 60 Begin agrarian 60 reforms det Indice 40 40 cultivafo 20 20 iontroP 0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Individual land Crops GDP Source: Statistical yearbooks. A final drawback to share privatization that deserves separate treatment was the barrier to exit from agricultural enterprises posed by the accumulation of overdue debt by agricultural enterprises. In Moldova, neither land nor property of agricultural producers with unresolved debts could be distributed because of creditor claims on them (Csaki, Lerman and Sotnikov, 2002). The reason for the accumulation of debt was inadequate farm profits. In 1998, for example, 91 percent of corporate farms in Moldova were unprofitable (Annex 1 Table 11). 17 Behind this accumulation of debt were the agricultural policies of the state that determined the willingness of the state, banks and input suppliers to forgive or reschedule state and bank debt and to extend new credits and subsidies to enterprises that were not making profits. In essence, the soft budgets that existed for agricultural enterprises in Soviet times continued into the post-Soviet period. Figure 6: GDP, livestock production and livestock inventories in individual farms in Moldova, 1985-2003 140 140 120 120 ) %( s Farm "share privatization" Land distribution m 100 100 farla dui div 0) in 10=58 80 80 in s (19 s ierotn 60 60 inve Indice Begin agrarian reforms ckot es 40 40 liv of 20 20 iontroP 0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Livestock privatization Livestock production GDP Source: Statistical yearbooks. A change of government in 1998 made possible parliamentary approval of the National Land Program, financed with assistance from USAID. The distribution of land under the Land Program halted asset stripping and the fall in crop production that had characterized the preceding 7 years. Agricultural enterprises were dissolved and land and physical assets distributed following the Law on Critical Property (November 6, 1998) and the Debt Law (May 13, 1999). The Law on Critical Property broke the logjam for the transfer of non-land assets of collective farms to recipients of physical land plots by ruling that creditors were not allowed to claim such assets in payment for unpaid debts and land recipients were relieved of secondary liability on debts of farms under privatization. The Debt Law specified an out of court liquidation procedure for privatizing agricultural enterprises. If a farm was insolvent, farm debts to private creditors were transferred to the state, with the agreement of the latter. The state settled these debts with a tax credit. Farm debts to the state were "settled" primarily by the sale of social infrastructure assets to the state (Law no. 187-XIV "On introducing amendments in some legislative acts" and Law no. 392-XIV "On restructuring agricultural enterprises in the process of privatization"). The Moldovan land reform process of share privatization, followed by distribution of plots, followed by reformation of corporate farms was quite long and controversial, allowing plentiful asset stripping in the period before physical distribution of plots. This long period of halfway reform itself probably contributed to the fall in crop production, though this is 18 difficult to claim with confidence, because GDP also fell until 2000. The fall in crop production stopped shortly after physical land distribution, though GDP also turned up in the same year. Local government reforms and public service funding Local government in Moldova has suffered from the same on and off reform that characterized land reform. During the period of land share privatization, the government introduced reforms in local level governance, and the 1994 Constitution took steps to decentralize public services. In 1997, the government committed itself to increasing the financial autonomy of local authorities. The subsequent 1998 reform gave local authorities greater scope to collect local taxes, although in practice the small local tax base has limited the revenues available to local and district authorities. The 2003 reform reduced the number of taxes, including the value-added tax (VAT) collected by local governments. Moldovan local governments suffer from a critical lack of tax revenues with which to fund rural services, and have overlapping mandates with other levels of government. Local authorities have little incentive to increase local revenues, since the largest portion of revenues go into the central budget. This also reduces their incentive and capability to improve enabling conditions for farm or off-farm enterprises. Nor can they provide the kinds of incentives that once induced rural professionals to remain in villages. As a result, many rural municipalities have lost (or cannot attract) qualified staff to manage and run the services they are mandated to provide (Deane and Catrinescu, 2004). In general, fiscal reform has focused on administrative rather than on actual fiscal autonomy. Disposition of land received Farm reform resulted in 56 percent of cultivated land being farmed by individual farms (2002), while 91 percent of livestock inventories are in individual farms (Figures 5 and 6). The remaining 44 percent of cultivated land is farmed by newly-formed corporate farms. Under the Moldovan land reform, "leaders" from farms subject to dissolution were able to appeal to farm employees to lease their land and non-land assets to new corporate farms (cooperatives, joint stock companies, etc.). Nearly all respondents in the World Bank survey used some of the land received through land reform themselves, while about 40 percent of respondents leased out land to large farms (Annex I Table 3). While an average household in Moldova owns 2.5 hectares, it uses only 1.5 hectares. Nearly all owned land was received during the land privatization process. In principle, the Moldovan land reform distribution stressed equity over efficiency. Land was distributed to a wide range of rural inhabitants, including farm employees, retirees and others. Most recipients received various types of land in fragmented plots. It is therefore surprising that only about half of respondent households considered the land allocation fair. Moldovan households that rated the land reform as unfair stressed the lack of information in the distribution process, land fragmentation and poor quality of land (Annex I Table 10). Sixteen percent of households believed they were not informed of their rights and 19 percent found titling officials unavailable. Thirteen percent of respondents believed the land distribution process was unfair because it resulted in land fragmentation. Thirteen percent believed they received poorer quality plots than others. Informal interviews suggest that in practice, former 19 farm management, backed by municipal, regional, even central authorities, frequently discouraged households from removing their land from farming associations. Box 5: How a collective farm in Taraclia region lives on In the southern region of Taraclia (a region characterized by large farm enterprises) a nominally restructured collective farm continues to operate. Workers on the farm reported that its powerful manager has used his ties with municipal authorities and police to prevent all but two well-connected and determined families from withdrawing land. The remaining population in this village of 6,000 lack land titles and don't know where their physical plots are located. Source: Focus group discussions and household interviews Economic performance of farms Although land reform does not seem to have had an immediate effect on crop or agricultural labor productivity, it does seem to have resulted in gradual improvement, especially when compared to the likely counterfactual of continued decline. Livestock and crop yields in Moldova fell through 1994, after which they have been relatively stable (Figure 7). Labor productivity based on official figures fell through 2000 after which it has increased slowly. In Moldova there has been no steep decrease in agricultural labor as seen in Estonia, the Czech and Slovak Republics and Hungary. This suggests that there has been little if any of the labor shedding observed in those countries. Figures on agricultural labor in Moldova are particularly uncertain, which implies that labor productivity calculations are uncertain as well. Though official figures on agricultural labor indicate that there has been very little change in the number of those employed in agriculture (around 700,000), official figures also indicate that there has been substantial emigration from rural areas of Moldova. At the same time non-farm employment in rural areas has declined severely, so that it is possible that labor out-migration has been compensated by in-migration from other sectors. All these facts raise doubts about the agricultural labor figures, but do not decisively disprove them. 20 Figure 7: Indices of crop and livestock yields and agricultural labor productivity in Moldova, 1985-2003 160 140 Farm "share privatization" Land distribution 120 100 0) 10=5891( 80 xe Ind 60 40 20 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Labor Crops Livestock Source: Statistical yearbooks. The immediate effects of land reform in Moldova were to move about half of production from corporate farms to individual farms. The yield implications of this limited movement to individual farms were relatively small for two reasons. First, the potential for yield improvement was limited. Moldovan crop yields in corporate and individual farms never differed by much. Compared with Azerbaijan and Kazakhstan, the two other countries for which yield data exists by sector, crop yields in individual and corporate farms have been relatively similar after 1994 (Figure 8). However, for crops, the movement of the dotted line in Figure 8 above the lower line indicates that land reform actually raised yields above what they would have been had production remained in corporate farms.10 Second, only half of land in farms was moved to individual farms, also a rather modest change. This is another reason why the dotted line in Figure 8 moves so little. If we consider, however, a more medium term view of land reform our judgment about its effects becomes quite a bit less certain, but perhaps more positive. What if there had been no resolution of the debt crisis and no dissolution of collective farms after 1997? A naïve answer to this question (about the best we can do) is that the yield trends of 1996 to 1998 would have continued. For crops this would indicate a continued fall. Seen in this perspective, the modest gains in crop yields recorded after 2000 in Figure 8 are not as small as they appear. If the alternative without land reform was continued declines in yields then even stabilization and a modest rise would seem to be an achievement. 10According to available FAO data, transfer of livestock to individual farms seemed to reduce yields below what they would have been, at least until 2000. The livestock yield data (Annex I Figure 2) are puzzling. If livestock yields were higher in corporate farms, it is unclear why more corporate farms have not taken up livestock breeding. The sudden switch in livestock yields in 2001 is also puzzling. Because of these apparent data quality problems, no further attempt will be made in this report to interpret livestock data. 21 Figure 8: Aggregate, corporate farm and individual farm crop yields in Moldova, 1990- 2002 60 50 Individual farms 40 Corporate farms yields crop 30 Aggregate yield of ndexI20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Source: Statistical Yearbooks. A comparison between corporate and family farms based on the World Bank survey in Moldova shows that total factor productivity on family farms was higher than on corporate farms (Table 3). Family farms also have higher output per hectare, while corporate farms have higher labor productivity. These land and labor productivity differences may be shaped partly by differences in production profiles between corporate and family farms. Livestock is raised nearly exclusively in family farms and in private (household) plots, rather than in corporate farms. Since livestock production requires labor, but little land, this may account partly for the high land productivity and low labor productivity in family farms. As in Bulgaria, it is impossible to disentangle productivity differences due to scale and organizational form, because the sample is segregated, with smaller categories nearly exclusively family farms and larger categories corporate farms (Annex I Table 5). Thus, it is not possible to draw robust conclusions from this comparison. Table 3: Productivity measures for surveyed farms by type in Moldova TFP Labor productivity Land productivity Farm type N Output / total Output* Profit* Output* Profit* costs /AWU /AWU /ha /ha All farms 200 5.4 10.7 10.7 15.0 0.84 Family farms 176 5.9 9.9 0.8 10.8 0.83 Corporate farms 24 1.7 16.7 1.6 3.3 0.92 * 1000 LCU Note: AWU=average work units; LCU=local currency units. TFP= total factor productivity. Indicators that are statistically different at the 20% or better level are in bold italics. Source: World Bank survey of farms (2003). 22 The profitability of corporate farms appears to have significantly improved after 1998 (Annex I Table 11). Much of this is probably due to debt write-offs, but an improvement in the performance of corporate farms in Moldova cannot be ruled out. The improvements in profitability seem to be unrelated to changes in crop and livestock productivity, but are more correlated with crop production (Figure 5). Well-being of rural households Moldovan households ranked their subjective well-being better than Bulgarian households, though not as high as households in Azerbaijan or Kazakhstan (Annex I Table 6). Only 14 percent of households ranked their current level of well-being as high, while 35 percent of respondents ranked their well-being as low. On the positive side, 29 percent of households believed that their well-being had improved in the past 3 years. A comparison of the profiles of households reporting high and low levels of perceived well-being in Moldova shows that high-level households tend to have higher education, are younger, and tend to be headed by males rather than females (Annex I Table 9). Female headed households (33.3 percent) were likelier than male headed households (21.7 percent) to feel their well-being had deteriorated in the previous three years (Annex I Figure 1) Moldovan household perceptions of the enabling environment for farming were on the whole better than those in other countries save Kazakhstan. In particular, access to advisory services, veterinary services, inputs and most land transactions scored well. Moldovan households rated access to satisfactory irrigation services the most difficult of all farming services. Access to loans for farm investments seemed to be less of a problem in Moldova than in the other three countries surveyed. Farming in Moldova is relatively labor intensive. The ratio of agricultural labor per hectare is the highest of the countries surveyed. The labor intensive nature of agriculture in Moldova has had two important implications for farming. First, farming in Moldova has had an extensive influx of labor (Annex I Table 4). The agriculture sector in Moldova seems to have attracted labor from other sectors (such as processing) as workers have been laid off from other jobs. Labor intensive agriculture does not present the kind of capital start up costs found in other countries such as Bulgaria. Second, the enabling environment for farming for households and enterprises is similar. With fewer capital start-up costs than in other countries, households and enterprises (family and corporate farms) in Moldova ranked their enabling environment quite similarly, with most indicators being ranked only slightly easier for enterprises (Annex I Table 7). A comparison of the structure of income in Moldova and Bulgaria shows how important food production and marketing are to the average household in Moldova, and how important pensions are to households in Bulgaria (Annex I Table 8). Whereas the portions of household income from salaries (from both on and off-farm employment) and lease payments received in Bulgaria and Moldova are similar, Moldovan households earn nearly 40 percent of their income from production and marketing of agricultural products, while Bulgarian households earn only 14 percent of their income this way. Whereas a third of the income of rural households in Bulgaria country comes from pensions, pensions account for only 14 percent of household income in Moldova. 23 Rural services, social benefits and community life Moldovan households believe that the levels of telephone and electricity services have improved since land reform (Annex I Table 12). Access to social benefits has generally deteriorated in the opinion of households, but the level of pensions has increased (Annex I Table 13). Certainly, more limited access to social benefits is to be expected as part of the move toward a more monetized economy. However, access to education and health services, two social benefits that are clearly within the mandate of the state, have deteriorated significantly as well. In a survey conducted in 2002 by Transparency International Moldova, more than 80 percent of respondents considered the deteriorating quality of the education and health care systems to be one of the most severe problems in Moldova (Deane and Catrinescu, 2004). Moldovan households also believe that community life has deteriorated, as indicated by a rise in alcohol use and domestic violence, though the deterioration is not as drastic as that perceived by Bulgarian households (Annex I Table 14). Interviews and observations noted the proliferation of bars in villages, and respondent concerns with increasing alcohol abuse by women and children as young as 12. Children of parents who had migrated were likelier to drop out of school and/or suffer. Informal interviews found that in the face of a perceived increase in crime, villagers either failed to report the crime or took the law into their own hands because they saw the police as ineffective. Conclusions Land reform, interpreted as the transfer of production from corporate to individual farms, achieved positive, if modest, improvements in Moldova. Yields and productivity have improved -- for crops, yields in individual farms were 21 percent higher than those in corporate farms over the entire period from 1990 to 2002. Almost one-third of surveyed households felt their well-being had improved in the past three years. And although there appear to have been few potential immediate yield gains to be made, it is doubtful that crop yields would have improved without land reform. A naïve estimate of the course of crop yields in the absence of land reform amounts to a continued fall rather than a modest improvement. The most likely underlying reason for the relatively small difference between individual and corporate farm performance is the continued poor enabling environment and biased policies in Moldova for farming. Continued ad hoc intervention in markets by the government kept and keeps yields in both individual and corporate farms low. The improvement in yields and increase in agricultural production after 2000 came during a period of lessening of interventions. This changed in 2003 (triggered by the damaging 2003 drought) with renewed interventions in grain markets accompanied by controls on processing margins for millers. Corporate farms in Moldova are a mixed bag, some performing reasonably well and some badly (East West Management Institute, 2004). However, the profitability of corporate farms as a group seems to have improved dramatically after 1998. Though this improvement is undoubtedly partly a result of debt write-offs, a general improvement in corporate farm performance cannot be ruled out. The slight improvement in labor productivity after 2000 may be part of the reason for improved profitability of corporate farms. However, there is no evidence to suggest that there has been a large scale labor shedding from corporate farms, as witnessed in the Slovak and Czech Republics. The World Bank survey of farms gave inconclusive evidence on productivity differences between family farms and corporate farms, 24 because the sample is segregated, with smaller categories nearly exclusively family farms and larger categories corporate farms. 25 With some of the poorest governance indicators in the CIS, how did Azerbaijan implement a land reform viewed by farmers as quite fair, and which led to a substantial increase in productivity? 1995 and 1996 were critical years for Azerbaijan. By 1995, GDP had fallen to 36 percent of its 1990 level, inflation was over 400 percent per year and gross agricultural output (GAO) was half of its level in 1991 after the most rapid fall in the CIS. Moreover, it was doubtful that the Azerbaijan government had the capability to turn the country around. Government effectiveness, rule of law, control of corruption, and regulatory quality were all low in Azerbaijan in 1996 (Annex I Table 1). Agricultural reform indicators developed by the World Bank were also the lowest of the 4 countries considered. Eight years after the beginning of agricultural reforms in Azerbaijan the results are beyond most people's expectations. Agricultural production has grown steadily since 1996, save for one year. Crop yields have also increased steadily and GAO has recovered to three quarters of its 1991 level. How can this be explained? The context of land reform The Azerbaijan policy environment for agriculture and rural development is characterized by a stable macro-economy, moderate agrarian reforms, but a very poor business environment. The macroeconomic policy environment in Azerbaijan improved in 1995/96 with the stabilization of the currency reducing inflation from over 1600 percent to below 5 percent per year between 1994 and 1997. GDP began to grow in 1996 and has accelerated to an average rate from 2000 to 2002 of over 10 percent per year. This high level of growth conceals the unbalanced nature of the Azeri economy. Azerbaijan has a modern and efficient oil extraction sector which accounts for 32 percent of GDP while employing only 1 percent of the workforce (2001). The second largest sector in GDP, agriculture, accounts for 16 percent of GDP, but employs nearly 40 percent of the workforce. Though the macro environment has been stable and growing since 1996, the enabling environment for agriculture is poor. Though the Azeri government made rapid progress in liberalization of the agricultural sector, the government of Azerbaijan has taken few steps toward restructuring government and public institutions to serve the needs of private agriculture (Figure 9). One of the most difficult problems for Azeri agriculture has been the poor business environment. Four fundamental problems face businesses in Azerbaijan: weaknesses in the legal and regulatory system, pervasive administrative barriers to investment, weaknesses in infrastructure provision and corruption (World Bank, 2005). A further basic problem specifically for agriculture has been the extreme weakness of government agencies that should normally be in charge of making and implementing agricultural regulatory policies, such as the Ministry of Agriculture. Despite the stable macro-economy, the poor business environment and the lack of public institutions serving and regulating private agriculture have had deleterious effects on farmers in at least several ways. First, the poor business environment and lack of regulatory capacity has discouraged investment in agriculture and agribusiness. Lack of modern processing technology limits product quality, in turn limiting the ability of processors to access lucrative markets in Baku or abroad. Food processing production fell the furthest of the countries considered here and began to recover only slowly, starting in 1998. By 2002 food processing production was only 16 percent of its level in 1990. Second, lack of regulation (and trust) 26 also limits incentives for long term (even for a season) contracting between producers and processors. This means that producer-processor coordination in Azerbaijan is either non- existent (producers sell mostly in rural and urban markets) or is a spot market, limiting the ability of both sides to plan and expand production. Third, in the end, the poor business environment and lack of institutional capacity limits the prices that producers receive for their commodities. Nominal Protection Coefficients for agricultural producers in Azerbaijan average around 0.8 for crops, and about 0.6 for grapes and pomegranates. The NPCs for livestock outputs are even worse, 0.5 for beef, 0.8 for milk and 0.3 for mutton. Low NPCs are one result of government policies and market failures that reduce farm gate prices. Such low farm gate prices barely cover the cost of harvesting and certainly not the cost of farm and equipment maintenance or new investment (World Bank, 2005). Figure 9: Azerbaijan: Status of agrarian reforms 50 45 40 ax=50) 35 m( usta 30 5 5 5 5 5 st 5 rmo 25 5 6 6 6 4 5 5 ref 20 4 6 6 6 6 Bank 5 6 drlo 15 5 W 8 8 8 8 8 8 10 6 5 6 7 7 8 8 8 8 0 1997 1998 1999 2000 2001 2002 2003 Year Price and market Land reform Agro processing Rural finance Institutional Note: The indices measure the status of agrarian reforms in five key areas, with each index ranging from 1 (centrally planned economy) to 10 (completed market reforms). Source: World Bank. The design and implementation of land reform and agricultural production Unlike Bulgaria and Moldova, where land reform was the subject of vigorous parliamentary struggle, in Azerbaijan, land reform and farm restructuring was closely associated with President Aliev, who had favored agriculture during his reign as First Secretary of the Central Committee of the Azerbaijan Communist Party (1969-1983), and who had started agricultural reforms in the Nakhichevan Autonomous Republic in 1992. After his return to power in 1993, President Aliev ordered the formation of special commissions in order to formulate the agrarian reform in December 1994 and March 1995. The main outcome of these 27 commissions was the 1996 law "On land reform" (Mamedov, 2000), the basic legislation on the dissolution of state and collective farms in Azerbaijan.11 The 1995 and 1996 Decrees of President Aliev on farm and land reform aimed at the privatization of Azeri agriculture and the dissolution of collective farms.12 These decrees defined the procedures for dividing up and distributing both land and material assets of collective and state farms. The State Land Committee was charged with carrying out the necessary land survey work for division of land into parcels, as well as for issuing land titles. In-kind land distribution was gradual at first, but picked up pace after 1998 with further intervention by the President. A Presidential Decree "On Measures to Accelerate Reforms in Agriculture" (22 March 1999) noted three abiding problems in the implementation of reforms in agriculture--slow progress in the issue of titles to household farms, unsatisfactory performance of agricultural enterprises and unsatisfactory implementation of legislation by the Ministry of Agriculture and the Deputy Prime Minister for Agricultural Affairs. There followed more resolutions and decrees to ensure implementation of the 1995/6 Presidential Decrees as they were originally intended and curb corrupt practices. Figures 10 and 11 illustrate that both the transfer of livestock and distribution of land were implemented quite rapidly. The transfer of livestock inventories to individual farms began even before land reform, picking up pace after 1996. The share of cultivated land in individual farms grew first gradually and then quite rapidly, starting in 1996. The transfer of livestock and land to individual farms was closely followed by the stabilization and then growth of production. Surprisingly, livestock production stabilized in 1994 even though GDP was still falling. 11 Land and farm reform in Azerbaijan before 1995 did not extend beyond Gorbachev-era reforms such as formation of family farms and greater decision making flexibility for state and collective farms. Azerbaijan retained the state and collective farm system until 1996. 12"On the Basis of Agrarian Reform" and "On the reform of state and collective farms" (both of 18 February 1995) and "On Land Reform" (16 July 1996). 28 Figure 10: GDP, crop production and portion of land in individual farms in Azerbaijan, 1985-2002 120 120 Land distribution ) 100 100 %( rmsaf 80 80 alud 0) 10=58 indivi in (19 60 60 s land Begin agrarian det Indice 40 reforms 40 cultivafo 20 20 iontroP 0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Individual land GDP Crops Source: Statistical yearbooks. Figure 11: GDP, livestock production and portion of livestock inventories in individual farms in Azerbaijan, 1985-2002 120 120 Begin agrarian ) reforms Land distribution %( s 100 100 rmaf alud 80 80 viid 0) in 10=58 in (19 60 60 s esriotnevni Indice 40 40 ckot esvilfot 20 20 en rc Pe 0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Livestock GDP Livestock Source: Statistical yearbooks. 29 Local government reforms and public service funding In Azerbaijan local government reform is relatively recent, and neither the problem of proper delineation of government mandates nor of the provision of tax revenues sufficient to fulfill the mandate of local government has been resolved. Due in part to the resistance of regional authorities fearing loss of power, it was not until 1999 that the Law on Municipal Elections and the Law on the Status of Municipalities was enacted, and January 2000 when the first elected local governments took office. Current legislation gives citizens the opportunity to participate in local governance through referenda, assemblies, or proposing initiatives. Local councils can establish local taxes, adopt budgets, report on budget performance, and approve local programs for social protection. Chairpersons, elected from among council members, also act as heads of the executive apparatus (Munteanu and Popa, 2001). Tensions and ambiguities remain between local state administration bodies and elected municipal governments, since their relations are not fully detailed in legislation. Although they can receive financial assets from legislative and executive authorities, mechanisms for receiving grants, donations and subventions from the state budget remain unclear. Although some municipal revenue was to come from renting out municipal property, transfer of state assets was in many cases delayed, in some cases property was privatized, and of the assets actually transferred, much proved to be unprofitable. Thus, municipalities are unable to rely on their own revenues. Most services are still implemented through local branches of the state administration. Although in principal, municipalities restrict their activities to maintaining housing, social, cultural and sports establishments, and public areas including streets and parks because of resource constraints. In the past few years, actual transfers to municipalities have been far below amounts promised in the state budget.13 Finally, many mountainous communities are so remote and roads so impassable that they have fallen off the radar screen of municipal authorities. The study team found that district authorities appeared unaware of the location of a number of such villages, while villagers faced practical obstacles in reaching district offices. Disposition of land received Unlike in the other countries surveyed, land reform in Azerbaijan did not explicitly allow for newly formed cooperatives or other types of corporate farms. Moreover, land in Azerbaijan seems to have been distributed quite widely. By 2002 96 percent of cultivate land and 98 percent of livestock inventories were in individual farms. Nearly all households in the World Bank survey received land as a result of land reform, and this land was the only land owned by households other than their plot near their house (Annex I Table 3). About 80 percent of households chose to farm the land themselves; while 9 percent leased land to other persons and 16 percent left some land unused. Only 10 percent of households leased out land. The equitable distribution of land in Azerbaijan was reflected in the World Bank survey results. In a country where assessments of governance and corruption have been uniformly 13See Mamedova, et al. (2001), International Development Association Country Assistance Strategy for the Republic of Azerbaijan, 2003 (2004); State Programme on Poverty Reduction and Economic Development (2004). 30 low (Annex I Table 1) 92 percent of surveyed households in Azerbaijan judged the land reform to be fair (Annex I Table 3). Table 4: Monthly per capita expenditure, perceived well-being, and income composition of surveyed households that use / do not use land received during land reform Using land Not using land received received through through privatization privatization Monthly per capita expenditure 144,581 121,709 ** (local currency) (AZM) (AZM) Perceived well-being (% of 15.2 11.1 households rating today's well-being as high or very high) % of households indicating that well- 17.6 19.0 being improved in last 3 years Percent in total income Total salary from wage 10.0 12.7 employment (cash / in kind) Value of farm production 28.8 21.9 *** consumed in the family Sales of farm products 39.1 26.0 *** Rent/lease payments received 0.0 2.1 *** (for land and assets) Total revenue from other 1.2 5.1 *** private non-farm business Pensions 12.3 20.5 *** Social assistance 1.3 2.4 *** Gifts and remittances 0.1 2.6 *** Other 7.1 6.6 Asterisks mark significant differences between households that use land they received through privatization and households that do not use land that they received through privatization. ***, **, * differences are significant at 1%, 5%, 10% significance level. Source: World Bank Survey, 2003 On average, profiles of surveyed households that used and did not use land received through land reform are consistent with the hypothesis that those who chose not to farm distributed land are older households that lease out their land and farm private plots primarily for subsistence (Table 4). Households using land received in land reform had higher overall incomes and higher income from farming (particularly from sales), but lower pensions, social assistance and gifts or remittances. Economic performance of farms Land reform in Azerbaijan was followed closely by increases in crop and livestock yields (Figure 12). Even agricultural labor productivity in Azerbaijan appears to have started to grow in 2000, a result of growth in GAO that has averaged 8.4 percent per year since 1998. 31 Figure 12: Indices of crop and livestock yields and agricultural labor productivity in Azerbaijan, 1985-2003 140 Begin agrarian reforms Land distribution 120 100 80 (1985=100) 60 ndexI 40 20 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Labor Crops Livestock Source: Statistical yearbooks. Figure 13: Aggregate, corporate farm and individual farm crop yields in Azerbaijan, 1990-2002 60 50 40 ds Individual yiel farms crop 30 Corporate of farms Index 20 Aggregate yield 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Source: Statistical Yearbooks. 32 Part of the reason for the impressive increase in crop yields following land reform in Azerbaijan is that there was a very large potential for yield increases solely from privatization (Figure 13), indicated by the large and continuing differences in crop yields between the corporate and individual farm sectors. However, the yield increases in Azerbaijan cannot have been derived solely from the redistribution of land. Individual and corporate farm yields have both risen and continue to do so even after land was redistributed. Figure 14: Aggregate, corporate farm and individual farm livestock yields in Azerbaijan, 1990-2002 120 100 dsle 80 yi Individual farms 60 vestockil Corporate farms of Aggregate yield Index 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Sources: Statistical Yearbooks. In Azerbaijan productivity measures for family farms were higher than those for corporate farms in each category measured (Table 5). These measurements appear to reflect differences in organizational form. In contradistinction to Moldova and Bulgaria, where it was impossible to determine whether differences in productivity derived from scale or organizational form because family farms were concentrated in the lower size categories and corporate farms in the large categories, the sample of farms in Azerbaijan included family and corporate farms of a wide range of sizes (Annex I Table 5). Table 5: Productivity measures for surveyed farms by type in Azerbaijan TFP Labor productivity Land productivity Farm type N Output Output* Profit* Output* Profit* / total /AWU /AWU /hectares /hectares costs All farms 80 2.1 7,032 5,714 1,589 1,612 Family farms 65 2.3 7,803 6,305 1,762 1,819 Corporate farms 15 1.0 3,692 3,054 840 680 * 1000 LCU Note: TFP=Total factor productivity; AWU=average work units; LCU=local currency units. Indicators that are statistically different at the 20% or better level are in bold italics. Source: World Bank survey of farms (2003). 33 The profitability of agricultural enterprises in Azerbaijan has improved greatly since 1998. It can be presumed that there are many reasons for this--debt relief, restructuring, the general recovery of production and growth in yields. But in truth little is known about the few remaining corporate farms in Azerbaijan (2,420 on April 1, 2002), except that they come in a large variety of sizes and are less productive than similarly sized family farms.14 Well-being of rural households There is an important disparity between the excellent sector performance and the mediocre subjective well-being of rural households in Azerbaijan. With clear improvements in yields, growth in production and decreases in rural poverty, it would seem likely that the perceived well-being of Azerbaijan households would be higher than in the other surveyed countries. However, only 14 percent of surveyed households in Azerbaijan rated their current level of well-being as high, the same portion as in Moldova. Moreover, only 18 percent of households believed that their level of well-being has improved over the past three years, lower than Moldova where yields and production increased only modestly following land reform. More positively, in Azerbaijan, the lowest portion of farming households believed that their level of well-being had deteriorated over the past three years. However, there is still a disconnection between sector performance and the subjective well-being of Azerbaijan households. One key to the disparity which will be considered in the next section is the substantial deterioration in rural services in Azerbaijan and their generally low level compared to urban areas. The provision of gas per rural resident deteriorated tenfold from 1990 to 2000, while supplies per urban resident rose. Moreover, the disparities in service provision per resident between rural and urban areas for gas, clean water and plumbing are on the order of ten to one (Table 6). The increase in agricultural employment observed in Azerbaijan probably does not explain the low number of households reporting that their well-being increased in the past 3 years. Although there has been an increase in agricultural employment in Azerbaijan since 1989 with substantial jumps in 1990 and 1999, after 1999 agricultural employment fell. Assuming the figures on agricultural labor are accurate, the increase in agricultural employment could indicate substantial urban-rural migration. With more labor and less production per worker, income from farming per worker would fall. However, after 1999 agricultural employment has been falling, which has caused a rise in labor productivity in 2000 and 2001. If this trend continued into 2002 and 2003 then it can not be an explanation for the low number of households reporting that their well-being had increased in the past 3 years. Rural household perceptions of their enabling environment in Azerbaijan are quite consistent with their perceptions of well-being: worse than in Moldova, though not quite as bad as Bulgaria (Annex I Table 6). Access to loans, agricultural equipment and other inputs were judged particularly difficult in Azerbaijan. A comparison of households reporting high and low well-being shows that high well-being households had better education, were less likely to be headed by a female, were more likely to be ethnic Azeris rather than from other ethnic groups (mainly Talish) and were more likely to be from North East Azerbaijan, an area covered by World Bank land reform and post privatization projects (Annex I Table 9). 14The World Bank Survey includes information on 15 such farms, of which 80% are newly formed farms. 34 Farming in Azerbaijan is comparatively labor intensive. The ratio of agricultural labor per hectare there is nearly as high as in Moldova. As in Moldova, agriculture in Azerbaijan has had an influx of labor (Annex I Table 4), perhaps as a result of unemployment in other sectors. It is therefore surprising that with few capital barriers, Azerbaijan enterprises rate their enabling environment quite a bit better than do farming households (Annex I Table 7). In Moldova enterprises rated their enabling environment only slightly better than did households. The difference between the two countries appears to lie in the size distribution of farm enterprises (family and corporate farms). In Moldova, farm enterprises surveyed were predominantly under 5 hectares in size. This fact in itself seems to indicate that technology in household farms and farming enterprises differs very little. In Azerbaijan, farm enterprises in the sample were quite a bit larger, on average 151 hectares. This substantial difference in size appears to indicate that the technology of farming in this sample of farming enterprises is adapted to raising crops (wheat or cotton) in large fields, requiring mechanized harvesting. In Azerbaijan farm enterprises (both family farms and corporate farms) rate access to inputs, farm machinery, advisory services and marketing channels far easier than did household farms. Finally, one reason why households in Azerbaijan may be more pessimistic about their level of well-being is that the level of risk in household income is quite a bit higher in Azerbaijan than in any other country surveyed (Annex I Table 8). Incomes in other surveyed countries are significantly more diversified than in Azerbaijan. Fully 64 percent of household income derives from farm production in Azerbaijan, but only 11 percent from wage employment and 14 percent from pensions. Compare this with Moldova, the other country with labor intensive agriculture, where 33 percent of household income derived from wage employment, 40 percent from agricultural production and 14 percent from pensions. Rural services, social benefits and community life Rural household perceptions of the level of rural services in Azerbaijan show the greatest deterioration compared with the level before land reform of any of the countries surveyed for gas and electricity (Annex I Table 12). Availability of clean drinking water has not changed and access to telephone services seems to have increased. These perceptions may even underestimate the deterioration of public services, as reported in official statistics (Table 6), though it is clear that the deterioration in rural services predates land reform. The degree to which public services in rural areas of Azerbaijan have deteriorated is strikingly higher than that in urban areas. The general level of gas, water and plumbing services is also much lower in rural than in urban areas. During interviews, respondents reported that frequent weather- induced road closures interrupted the education of children, and was a reason more prosperous families preferred to move to towns with better educational offerings. Azerbaijan farming households, as households in other countries surveyed, report deterioration in access to subsidized rural social benefits (Annex I Table 13). The exception, as in other countries, is for pensions, which seem to have improved. 35 Table 6: Deterioration of Selected Public Services in Azerbaijan, 1990-2000 Year 1990 1995 1996 1997 1998 1999 2000 Gas supply per inhabitant (cu meters) urban 377.1 816.7 392 354.6 322.3 375.5 385.4 rural 379.9 127.6 30.8 25.1 27.3 23.9 31.0 Liquefied gas supply per inhabitant (kg) urban 1.5 0.2 0.2 0.2 0.2 0.1 0.2 rural 9.3 2.5 3.1 2.9 1.8 0.8 1.0 Average daily water supply per inhabitant, communal and personal needs (liters) urban 485.9 527.9 534.9 488.7 397.0 337.0 350.8 rural 18.8 7.8 6.4 5.4 2.4 7.9 3.9 Piped water infrastructure (% of settlements) urban 95.7 95.7 95.7 95.7 95.7 95.7 95.7 rural 10.8 11.5 11.5 11.5 11.5 11.5 11.3 Piped gas infrastructure (% of settlements) urban 100 100 100 100 100 100 100 rural 80.3 80.4 80.4 80.4 80.4 80.4 79.2 Source: State Statistical Committee of the Republic of Azerbaijan (2001b), v. 2, pp. 117, 119. Box 6: Rural services in Shemakha and Khachmaz districts of Azerbaijan Azerbaijani villagers in Shemakha district no longer have gas, because after the breakup of the state farm, the gas pipes were cut and sold. Likewise, a kilometer's worth of pipes that brought water from the district center was stolen. The culprits were said to be known but the police were uninterested. Formerly, irrigation water was distributed from a tank to which 4 km of pipes were connected ­ these were also stolen. In Khachmaz district, electric cables were stolen, and villagers themselves raised money to replace them and restore service. Source: Focus groups and interviews Azerbaijan stands out from the other countries in household perceptions of community life, which seem to have improved in many ways (Annex I Table 14). Rural households believe that compared with the level before land reform the levels of alcohol abuse, criminal activity and domestic abuse have all fallen. Informal interviews indicated that part of this is due to the increased importance of religion in Azerbaijan rural social life. But it is also undoubtedly due to the period of comparison, the early 1990s. In contrast to other countries, where the period preceding land reform might be characterized as "developed socialism," in Azerbaijan the early 1990s were years of war, political turmoil and a deteriorating socialist economy. Migration is considerably lower than in the other countries (9% of households reported a member absent in the previous 12 months, compared to 33% of Moldovan households). Although migration (mainly men doing military service or seeking work in cities or abroad) imposes a heavy labor burden on rural women, it does not appear to fragment families as was the case for a number of Moldovan households. At the same time, respondents felt concerned about the idleness and despondency of young men returning from military service, unable to find work and therefore marry take their expected place in rural society. Women in Azerbaijan more than in the other studied countries, felt excluded from public life. Formally mandated meetings organized by work collectives no longer take place, informal community institutions were information was shared and decisions taken are gender segregated, and productive activities have become individualized. Focus group discussions 36 from the World Bank survey found women less likely than men to attend public meetings or consult with authorities and less knowledgeable about the legal and administrative aspects of the reform, as well as its implications for their own households. As noted in an earlier section, female headed households were likelier to report low well-being then male headed households. Conclusions Azerbaijan seems to illustrate that overwhelming political will is often more effective in carrying out reform than the on-again, off-again reforms that come with a parliament divided between two opposing factions. Moreover, the single-minded "individualization" of Azerbaijani agriculture suggests that the Moldova and Bulgarian reforms, which resulted in a mix of corporate and individual farms, were truly formed of political compromise. Land reform in Azerbaijan aimed most decidedly at creating private, owner-operated farms, in contrast to the other three countries where this aim did not have the same weight. As a result, 96 percent of cultivated land was farmed in individual farms in 2002. Azerbaijan has also had very positive sector performance following land reform and farm restructuring. This is partly a result of the very large potential for yield improvements in performance in Azerbaijan from land reform, much larger than in Moldova or even Kazakhstan. However, the yield increases do not seem to have been derived solely from land redistribution. Private and corporate farm yields continued to rise even after land was redistributed. Despite this very good growth of agriculture, there have been few downstream improvements in processing in Azerbaijan leading to growth in food processing. Investment and contracting have been limited by the poor business environment and lack of regulatory policies and contract enforcement (World Bank, 2005). Good sector performance has also not translated into sizeable increases in the subjective well- being of farming households. Though farming households that use land they received under land reform seem to earn about 20 percent more than households that do not farm the land, farming households have few other sources of income but farming in Azerbaijan. This lack of income diversification in a country where farming is labor intensive means that the risk- adjusted income stream from farming in Azerbaijan is probably lower than it is in other countries where income is more diversified. The case of Azerbaijan also seems to illustrate the significance of governance in implementing rural reforms. Low levels of governance in Azerbaijan did not seem to prevent the proper implementation of land reform. The World Bank supplied needed technical guidance in the implementation of land reform, backed up by a government with political will. However, rural inhabitants in Azerbaijan have seen the most severe deterioration in rural public services of any of the countries surveyed, and attempts at organizing local government have been more difficult and taken longer in Azerbaijan than in Bulgaria or Moldova. This seems to indicate that low levels of governance present more problems for day to day maintenance of public services than for a one-time land reform, for which expertise can be imported. 37 Kazakhstan: Surprising results from a poor reform? By most accounts, Kazakhstan's land reform has excessively emphasized preservation of large farms, many of which have been bought up by vertically integrated private grain companies (Esirkepov, 2001). Preservation of large farms resulted in maintenance of the extremely uneven allocation of land from Soviet times, while "share privatization" made implicit promises to farm employees about land distribution that were not kept. Kazakh officials maintain that the land reform has favored efficiency over equity in an effort to avoid the fragmentation of land ownership observed in other countries. However, the skewed distribution of land, it is argued, carries with it a skewed distribution of income, which will preserve rural poverty. It is therefore surprising to find that the perceived well-being of farmers in Kazakhstan exceeded greatly that in other countries studied. And the highest portion of households indicating that well-being had improved in the past three years were found in Kazakhstan. Moreover, production of crops and livestock has increased in Kazakhstan nearly every year since 1998, and rural farming households are more satisfied with rural public services than in other countries. Perhaps most surprising of all, 78 percent of agricultural production now originates in individual farms. What part of these improvements are due to land reform, and what part to the oil-led economic boom? The context of land reform The enabling environment for farming in Kazakhstan is characterized by a stable macro- economy and government support that seems to favor large farms over small farms. The government of Kazakhstan stabilized the currency in 1996 after a period of severe inflation. Growth of GDP began in 1996 and, except for a brief fall in 1998 as a result of the Russian ruble crisis, has accelerated so that annual growth in 2002 was 10 percent. Some of this growth is led by oil production, though it would be erroneous to attribute these growth rates exclusively to the energy sector. Kazakhstan has managed its windfall oil revenues so as to avoid symptoms of the "Dutch disease." For instance, under the State Agro Food Program for 2003-2005, 8 percent of the state budget is earmarked for support of agriculture. Thus, oil revenues have made possible this support, most of which goes to institutional and infrastructure development ("green box measures") (Serova, 2004). The enabling environment for agriculture in Kazakhstan seems to be supportive of large farms, though quite a bit less so for small farms. Under the State Agro Food Program for 2003-2005, agricultural producers can purchase inputs such as fuel, lubricants, seeds and fertilizers with a 40 percent subsidy. Bureaucratic requirements seem to create a disincentive for small farms to access these subsidies (Csaki and Zuschlag, 2004). Most credits from commercial banks are also directed to large farms. Small farm credit is currently far below needs, particularly for long term purposes such as equipment purchase. All farms can lease agricultural machinery at subsidized interest rates, though such machinery is often more appropriate for larger farms. The 2003 land code allows for private ownership of land, a move that is perhaps more important for small farms for collateral. However, land not already in family farms can be obtained only by purchase. Moreover, owners of land use rights will no longer be allowed to sub-lease their rights for farming. These stipulations of the 2003 Land Code seem to raise the costs to small farmers of operating in Kazakhstan. Finally, the government of Kazakhstan has lately begun to speak of the need for family farms to expand their size, raising doubts regarding the security of small farm land rights. 38 The World Bank indicators on the status of agrarian reforms in Kazakhstan are generally rather low, particularly for institutional reform and rural finance. Low scores in these two areas indicate a lack of government institutions for the support of smallholder agriculture and a lack of rural finance resources for small farms. The reform status indicators reinforce the view that the environment for farming in Kazakhstan is quite different for small and large farms. Despite only modest reforms, both crop and livestock production in Kazakhstan have been growing since 1998 (Figures 17 and 18). Figure 15: Kazakhstan: Status of agrarian reforms 50 45 40 ax=50) 35 m( usta 30 st 5 5 5 5 rmo 25 5 5 5 ref 5 6 6 7 20 6 6 6 Bank drlo 15 7 6 6 7 7 7 6 W 10 5 5 5 5 5 5 5 5 7 5 6 6 6 6 6 0 1997 1998 1999 2000 2001 2002 2003 Year Price and market Land reform Agro processing Rural finance Institutional Note: The indices measure the status of agrarian reforms in five key areas, with each index ranging from 1 (centrally planned economy) to 10 (completed market reforms). Source: World Bank. The design and implementation of land reform and agricultural production The Kazakh land reform can perhaps be best described as a combination of "share privatization," reducing the size and restructuring corporate farms and formation of family (peasant) farms. Share privatization in Kazakhstan started in 1993 when the collective form of property was eliminated in Kazakh legislation (Esirkepov, 1999).15 In-kind distribution of property shares was to take place at the initiative of the intended beneficiary with the agreement of the farm director, though land was to remain the exclusive property of the state. By 1995, however, the law "On land" specified that lands of restructured agricultural enterprises were to be divided into conditional land shares on paper and were to be granted into permanent tenure (not ownership) to members of liquidated and restructured collective and state farms, workers of state owned agricultural units, pensioners, as well as those who 15 Presidential Decree "On additional measures for privatization of the property of state agricultural, procurement, processing and service enterprises of the agro-industrial complex" (5 March 1993). 39 were employed in production or the social and cultural spheres of these farms, who resided in rural areas. Holders of conditional land shares had the right to: · transfer the land share right to the base capital of a business enterprise or as a unit share of a newly-formed production cooperative; · withdraw a land plot in-kind to form a family farm or for commercial farm production; · transfer or lease the land share right; · lease out the conditional land share right, or; · abandon the conditional land share right. By 1997, 2,277,000 conditional land shares of an area of 118 million hectares had been granted to recipients without charge. By 2002, owners of conditional land shares exercised their rights in the following way: · 18 percent of shares were transferred as base capital to newly formed corporate farms. These shares were primarily those of former managers and specialists of state and collective farms, members of their families and other persons who were better informed or were entrepreneurial. These persons gained access to the assets of newly- formed farming companies. · 29 percent of shares were transformed into physical land plots for forming family farms. The holders of these shares were primarily specialists from collective or state farms, who had agricultural machinery and financial resources. · 4 percent were sold to commercial farms, · 3 percent were transferred (given) to other persons, · 18 percent remained unclaimed or were returned to the government. These were the shares of rural residents who either never claimed their shares or abandoned them, because they migrated to cities or other countries. · 28 percent were leased out. These were primarily the shares of pensioners, social and cultural workers (doctors, teachers, etc.), the poor and those employed in other businesses. 40 Figure 16: Agricultural land in Kazakh farms, 1990-2002 200,000 180,000 160,000 140,000 120,000 ah 00 100,000 10 80,000 60,000 40,000 20,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 years Family farms Corporate farms HH farms Source: Statistical yearbooks. Share privatization of farms in Kazakhstan had the same problems as in Moldova, including maintenance of the soft budget constraint, little difference in cost management and preservation of barriers to forming family farms. As in Moldova, by 1998 the overwhelming majority of corporate farms in Kazakhstan were unprofitable (Annex I Table 11), leading to a "debt crisis" and demonetization of transactions. The Kazakh response to these problems was different than in Moldova, where "share privatization" was ended by dissolving former collective farms, distributing land and allowing the formation of newly-formed cooperatives and joint stock companies, predominantly under new management. In Kazakhstan, the debt crisis was addressed by bankruptcy proceedings, which allowed debt write-offs, buyouts of large farms by large, vertically integrated grain companies (processors), which sometimes brought in new management and access to capital, and the further concentration of land and property shares under management control (Gray, 2000; Esirkepov and Beisembaev, 2001). Qualitative information indicates that these measures did not go as far in breaking soft budget constraints and replacing subsidies as did actual dissolution of former collective farms in Moldova. In 2003 the government of Kazakhstan took a further step toward doing away with "share privatization" by outlawing share sub-leasing (affecting 28 percent of conditional land shares in the last category listed above), effective January 1, 2005. Article 170 of the 2003 Land Code states that these land shares were to be returned to the government on January 1 if the owners did not either purchase their land share, transform the land share into a physical plot in order to establish a family farm or transfer their share into a corporate farm by that date. It may be argued that Article 170 is a logical continuation of the bankruptcy process. The aim has been to do away with "share privatization," and concentrate corporate farm ownership and management, while avoiding a break-up of large farms through land distribution. However, 41 Article 170 has also probably had the effect of reducing the amount of land in family farms, which were the sub-leasers of land. Reductions in the size of corporate farms in Kazakhstan began in 1993 with the farm restructuring that accompanied share privatization. From 1993 to 1999 the area under farming in Kazakhstan's corporate farms shrank by two-thirds. A small portion of the area taken from corporate farms was used to form family farms, but most of the land was simply taken out of use (Figure 16). Nearly all of this was grazing land. At the same time the number of corporate farms in Kazakhstan fell from 7,000 to 4,600, so that the average size of a corporate farm fell from 29,000 to 12,000 hectares. Such farms are still far larger than even the largest categories of farms found in the United States.16 The average size of a family farm in Kazakhstan in 2002 was 312 hectares. The area under family farms grew rapidly from 1993 to 1997, but has grown more slowly since then. Still, the combination of reducing the average size of corporate farms and distribution of land for family farms has resulted in about 40 percent of cultivated land in individual farms. The different type of farming in the North and South meant that the reduction in the size of corporate farms affected mostly the North and family farm formation affected the South. In south Kazakhstan agriculture is specialized in fruit and vegetable production and a great deal of manual labor is used. Family farms are concentrated in the southern oblasts of Almaty, Atyrau, East Kazakhstan, Zhambyl and South Kazakhstan. The portion of land in individual (family and household) farms in these oblasts averaged 69 percent in 2002. In north Kazakhstan machinery is used to grow crops on large-scale corporate farms. In the North joint-stock companies and associations replaced collective and state farms. In the northern oblasts of Akmola, Kostana, and North ­Kazakhstan, the portion of land in individual (family and household) farms averaged only 30 percent. 16The Agriculture Resource Management Study of USDA lists "very large family farms" (with gross sales over $500,000 per year) with an average size of 798 hectares (1998) (Hoppe, 2001). 42 Figure 17: GDP, crop production and portion of land in individual farms in Kazakhstan, 1985-2002 160 160 Family farm area increase 140 140 (%) Reductions in the area of corporate farms s m 120 120 farla dui 0) 100 100 10=5891( div in ni 80 80 nd s la ceidnI 60 60 edtavi cult 40 40 of 20 20 rtionoP 0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Individual land Crops GDP Source: Statistical yearbooks. Figure 18: GDP, livestock production and livestock inventories in individual farms in Kazakhstan, 1985-2003 140 140 ) Family farm area increase %( 120 120 s Reductions in the area of corporate farms m farla 100 100 dui div 0) in 10=58 80 80 in s (19 s ierotn 60 60 inve Indice ckot 40 40 es liv of 20 20 iontroP 0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Livestock Livestock GDP Source: Statistical yearbooks. Agricultural production in Kazakhstan fell from 1993 to 1998, rising thereafter (Figures 13 and 14). An important reason for this increase is the simultaneous rise in agricultural prices 43 and GDP after 1999, reflecting the rise in oil prices and the good growth of Kazakhstan's regional trading partners of the past few years. Local government reforms and public service funding Kazakhstan is the only one of the four countries considered in this survey without local self- government in rural areas. The Law on Local Public Administration in Kazakhstan of 2001 defined the role of local councils (oblast, raion and city) and local executive bodies (oblast, raion, city and village) as that of implementing state policy on the local territories they served. Oblast or raion local councils are also responsible for receiving, evaluating and responding to citizens' demands. Currently, local budgets are supposed to finance local programs such as primary, secondary, vocational and specialized secondary education, and most health services. Targeted Social Assistance, the most important anti-poverty program, is financed from local budget revenues. However, as in the other four countries, these mandates of local government are largely unfunded. Localities cannot independently establish tax rates or determine the tax base, with the exception of the land tax. According to the 2001 World Bank Country Assistance Strategy, the system of intergovernmental relations has inadequate formal central coordination and an inefficient tax sharing system. Efforts to decentralize programmatic functions and fiscal capacity have been slow, and impact of the new election law and recent election of rural executive bodies are not yet clear. Within the vacuum created by unfunded mandates, large corporate farm managers still exercise a degree of power similar to that of local officials and many have taken on the role of service provider to workers and/or communities, where they as described as more powerful than the local appointed hakims. Disposition of land received The result of land reform and farm restructuring in Kazakhstan has been that by 2002 about 40 percent of land and 90 percent of livestock inventories were in individual farms. As the above discussion indicated, though land shares were distributed widely to rural inhabitants, actual land plots were distributed much more narrowly. Of the households surveyed by World Bank household farm survey only 37 percent actually received physical land plots during the land reform (Annex I Table 3). These households received on average 49 hectares, while the average land received for the entire sample was 18.4 hectares. About 14 percent of households used at least some of the land received themselves, while 16 percent leased at least some of it to large farms, 24 percent of households left some of the land unused and 43 percent left at least some of the land for someone else to use without payment. These results are consistent with the results of other surveys in Kazakhstan. However, findings regarding the number of people who received physical land plots must be interpreted with caution. Extensive discussions on the land reform in Kazakhstan and on this and other surveys suggest that there is still much confusion regarding the actual nature of land received by households in Kazakhstan. Some respondents may have thought they received physical parcels rather than land shares. Informal discussions found that many women felt their inferior bargaining power relative to men had caused them to receive more remote or poorer quality land plots. As in Azerbaijan, despite the gender neutrality of land legislation, women felt less informed and less likely to receive support in pursuing their rights. 44 Box 7: Land share distribution in Akmola oblast, Kazakhstan Anna, a local official in Akmola Oblast, recounted that when land shares were distributed in 1998, people were asked to "voluntarily" lease them back to the restructured farm. Then representatives came and told them it wasn't voluntary but required, although they didn't explain why. For five years the farm management deliberately recorded lower harvests to avoid lease payments. Now people lease land to individual farmers for 50 percent of the harvest. When the five year contracts were being renewed, Anna again refused to sign a lease and now wants to lease her entire share to a private farmer. It is not clear that the new Land Code will allow her to do this unless she is able to pay for her land shares. Source: Household interview It is surprising that in a country where the distribution of land is so skewed in favor of corporate farms that 60 percent of households judged the land reform in Kazakhstan fair. This is not much different from the numbers in Moldova or Bulgaria (Annex I Table 10). Of those who did not think the reform fair, the most common reason cited was that rural inhabitants were not informed of their rights. In fact, focus group interviews in Kazakhstan also showed that the land reform process and the rights of land share and land plot owners were unclear to most rural inhabitants. It is possible that this surprisingly positive assessment of the land reform refers to the initial distribution of land rights in the period 1993-1996. The initial share distribution was quite egalitarian. Moreover, at the time of the survey in 2004 article 170 of the 2003 Land Code had not come into effect. Profiles of surveyed households that used and did not use land received through land reform showed that those that used land received actually had lower incomes than those that did not use the land (Table 7). The differences between the two types of households lie in slightly higher pensions and considerably higher wage employment from households not using land received. Even households that did not receive land at all had incomes nearly as high as those that received and used land. This extraordinary result indicates that rural families that do not farm commercially have better opportunities from salary income, which once again demonstrates how the macroeconomic context of increased oil revenues translated into higher salaries and a better standard for living, even in the absence of thoroughgoing farm restructuring and equitable land reform. 45 Table 7: Monthly per capita expenditure, perceived well-being, and income composition of surveyed households that use / do not use land received during land reform Households that received land Households through privatization that did not Using land Not using receive land received land received through through through privatization privatization privatization Monthly per capita expenditure 6,994.7 8,476.5 * 6,074.6 (local currency) (KZT) (KZT) (KZT) Perceived well-being (% of 40.6 43.7 24.9 households rating today's well- being as high or very high) % of households indicating that 43.8 49.5 28.8 well-being improved in last 3 years Percent in total income Total salary from wage 40.9 50.6 43.7 employment (cash / in kind) Value of farm production 20.9 10.7 *** 13.4 consumed in the family Sales of farm products 16.4 6.0 *** 10.3 Rent/lease payments received 0.0 1.1 0.0 (for land and assets) Total revenue from other 0.2 2.1 1.3 private non-farm business Pensions 16.3 21.3 24.3 Social assistance 0.2 0.4 3.1 Gifts and remittances 0.3 0.1 0.8 Other 6.1 7.8 4.6 Asterisks mark significant differences between households that use land they received through privatization and households that do not use land that they received through privatization. ***, **, * differences are significant at 1%, 5%, 10% significance level. Source: World Bank Survey, 2003 Economic performance of farms From 1993 to 1997/98 land reform and farm restructuring in Kazakhstan was accompanied by a rise in livestock productivity and a fall in crop yields (Figure 19). After these initial movements, crop yields began to increase and livestock yields to fall. There are a number of possible explanations for these movements, not the least of which (in the case of crops) is weather. Much of the increase in the corporate farm yields between 1995 and 1999 can probably be attributed to fact that corporate farms took much of their marginal land out of production (Figure 19). Land reform (interpreted as movement of production from corporate to individual farms in Figure 20) also seems to have contributed to the increase in crop yields after 1998. Indeed, yields in individual farms were slightly higher than on corporate farms until about 1998. Starting around 1999, the gap between corporate and individual farm crop yields began to widen as yields on individual farms continued to improve, and that of corporate farms stabilized once the gains from taking marginal land out of production were exhausted. There is still significant unused potential to be gained by further formation of family farms (Figure 20). For livestock the rapid transfer of inventories to individual (family and household) farms seems to have had a quite positive effect on yields in the face of an overall negative yield 46 trend (Figure 21). However, movements in livestock yields are difficult to interpret because of the very large changes in livestock inventories during this period. Sixty percent of the livestock herd in Kazakhstan was disposed of between 1993 and 1999. Corporate farms slaughtered, exported, sold or transferred 90 percent of their inventories during this period, while household and family farms eliminated only 5 percent of their inventories. The final outcome was dispersion of livestock across a large number of smallholders and family farms, which are largely responsible for the recovery that started after 2000 (World Bank, 2005). The continuous decline in livestock yields can be explained by the lack of public support (marketing, feed, and veterinary services) targeted to the needs of smaller family farms (World Bank, 2005). Labor productivity figures in Kazakhstan should be used with great caution. The fall in labor productivity in 2000-01 is a result of a change in the definition of agricultural labor, so that these figures are not comparable with those that precede them. Still, in Kazakhstan there is no indication of the rise in agricultural labor productivity caused by widespread labor shedding in corporate farms that can be found in the Slovak and Czech Republics. Indeed, the lower production in corporate farms now implies that labor productivity is quite a bit lower than in previous years, just as in the other countries covered in this survey. Figure 19: Indices of crop and livestock yields and agricultural labor productivity in Kazakhstan, 1985-2003 180 Family farm area increase 160 140 120 Reductions in the area of corporate farms 0) 10=5891( 100 xed 80 In 60 40 20 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Labor Crops Livestock Source: Statistical yearbooks. 47 Figure 20: Aggregate, corporate farm and individual farm crop yields in Kazakhstan, 1990-2002 35 30 25 Individual farms Corporate yields 20 farms crop Aggregate yield of 15 ndexI 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Source: Statistical Yearbooks. Figure 21: Aggregate, corporate farm and individual farm livestock yields in Kazakhstan, 1990-2002 Sources: Statistical Yearbooks. 48 Table 8: Productivity measures for surveyed farms by type in Kazakhstan TFP Labor Land productivity productivity Farm type N Output / Output* Profit* Output* Profit* total costs /AWU /AWU /ha /ha All farms 200 4.2 767 265 58 33 Family farms 178 4.4 683 268 60 33 Corporate farms 22 2.7 1,446 248 44 28 * 1000 LCU Note: TFP=total factor productivity. AWU=average work units; LCU=local currency units. Indicators that are statistically different at the 20% or better level are in bold italics. Source: World Bank survey of farms (2003). In Kazakhstan productivity measures for family farms were higher than those for corporate farms in each category measured, except for output per labor unit (Table 8). These measurements appear to reflect differences in organizational form, because the sample of farms in Kazakhstan included family and corporate farms of a wide range of sizes (Annex I Table 5). The measurement of total factor productivity is particularly significant because measurements for the two farm types are statistically different, albeit only at a 20 percent level. The bankruptcy and buyout process and state policies for corporate farms in Kazakhstan seem to have improved the profit performance of farms. Debt write-off was a part of the process, and the rise in agricultural prices after 2000 was probably also important. But there is ample qualitative information indicating that much of the profitability of corporate farms is boosted by access to government support and credit programs funded in large part thanks to oil revenues which indicate at least a partial continuation of the earlier soft budget policies of the past. Even with these supports and subsidies, nearly half of corporate farms remain unprofitable (Annex I Table 11). In northern Kazakhstan there are certainly theoretical advantages to large-scale farms. Large farms, because of their higher sales and profits, can afford farm machinery, they may have scale advantages in marketing and obtaining finance for inputs, and they may facilitate their access to markets and finance by merging with processors or export firms. But all these advantages depend on the ability of large farms to make profits and reinvest them wisely, unless they are protected by the state from their creditors. The fact that nearly 50 percent of corporate farms in Kazakhstan are unprofitable raises serious doubts about whether the large farms in northern Kazakhstan are actually able to exploit their theoretical advantages of being large while being financially sustainable. Well-being of rural farming households Rural households in Kazakhstan rated their well-being considerably higher than well-being in the other countries covered in the World Bank survey (Annex I Table 6). Thirty-one percent of respondent households rated their well-being as high, about twice as much as the percent of Azerbaijani or Moldovan households rating their well-being as high. Only 23 percent rated their well-being low. Moreover, 36 percent of households in Kazakhstan believed that their well-being has improved over the past three years, the highest rating of the four countries covered in the World Bank survey. Rural household perceptions of their enabling environment are also the most positive of the four countries covered in the survey (Annex I 49 Table 6). Households in Kazakhstan rated their ease of marketing agricultural production, access to inputs, irrigation, advisory services, veterinary services and pasture land higher than did households in other countries. An important difference between Kazakh rural household incomes and the incomes of rural households in the other two CIS countries covered in the World Bank survey is that they seem to be less risky.17 The key difference between Kazakhstan and the other two CIS countries lies in the significantly higher salary income of rural households (Annex I Table 8).18 In Kazakhstan nearly half of household income derives from salaries received from agricultural enterprises or non-agricultural enterprises.19 This result is true of all oblasts surveyed (Almaty, Pavlodar, Akmola and West Kazakhstan), though the highest portion of salary income was reported by households in Akmola oblast (53 percent) and the lowest in Almaty oblast (39 percent). Reported household well-being was highly correlated with the portion of salary income in total income. The highest portion of households reporting high well-being (50 percent) was reported in Akmola oblast and the lowest in Almaty oblast (10 percent). Because of the large portion of income from salaries in Kazakhstan, sales of farm products as a portion of household income were relatively low and income from pensions was moderate. Here again, the positive macro-economic effects of the oil boom on the welfare of rural households clearly come into play, and likely overwhelm the potential drawbacks from the less than equitable land reform process. Indeed, the oil boom helps generate the demand for labor in rural areas, and also exerts upward pressure on wages. Both effects are correlated with the well-being of rural households. As noted before, farming in Kazakhstan is relatively labor intensive in the South and capital intensive in the North. Perhaps because of the more capital intensive nature of agriculture in Kazakhstan, it does not seem to have had the influx of labor from other sectors seen in Moldova and Azerbaijan (Annex I Table 4). However, Kazakh rural households and enterprises rated their enabling environment quite similarly. This is peculiar if we are to believe that agriculture is capital intensive in Kazakhstan. But the difference may indicate that households in northern Kazakhstan are able to draw on the services of large farms to which they are attached to assist in procurement of services (Annex I Table 7). Again, the overall macro-context of economic growth is probably the most relevant for understanding the heightened sense of well-being among rural households. Rural services, social benefits and community life Rural households in Kazakhstan indicated that the level of rural public services has improved substantially since the period before the dissolution of the collective or state farm (Annex I Table 12). Satisfaction with electricity and gas supplies, in particular, has improved greatly. Access to social benefits has decreased, as is to be expected with a less subsidized economy, with the exception of pensions, which have increased, though not as substantially as in Bulgaria or Azerbaijan (Annex I Table 13). Significantly, rural households in Kazakhstan do not feel that access to health care has deteriorated to the degree that it has in Azerbaijan or Bulgaria, although informal interviews revealed widespread variation among communities, even within a single oblast. These positive perceptions of the level of rural public services are 17Bulgarian rural household incomes are also less risky, though in that country pensions play a greater role in household income. 18Salaries in farm households were 2 months in arrears, on average. 19About 25% of income came from non-farm employment and 25% from employment in corporate farms. 50 likely to be fueled by the oil revenues, which enable the government to restore or maintain adequate levels of these services in rural areas. Perceptions of community life, as measured by alcohol consumption, domestic violence and criminal activity among both adults and youth, however, have deteriorated, although not as severely as in Bulgaria (Annex I Table 14). Respondents noted an increase of alcoholism even among women. Declines in service provision have impacted differently on men and women. Women were particularly concerned over the widespread closures of kindergartens. Not only has the drastic reduction in access affected children's school readiness, it impedes women's ability to participate in the labor market. Conclusions As in the other countries surveyed, we can not separate out the contribution of land reform and farm restructuring to improvements in farm performance in Kazakhstan. Improvements in crop and livestock yields in Kazakhstan since 1993 seem to have been a consequence of a combination of factors, including movement of production to individual farms, which also outperform corporate farms, rising GDP and agricultural prices, and perhaps improvements in weather. Beyond the issue of performance, though, the Kazakhstan land reform and farm restructuring appears to have achieved some of what land reform has achieved in Moldova and Bulgaria without the dissolution of corporate farms. 78 percent of GAO was produced in individual (family and household) farms in 2002 in Kazakhstan. In Moldova, 71 percent of GAO was produced in individual farms in 2002. Ninety percent of livestock inventories were in individual farms in Kazakhstan in 2002, compared with 91 percent in Moldova and about 90 percent in Bulgaria. A bit less land was in individual farms in Kazakhstan in 2002--41 percent--compared to 56 percent in Moldova (2002) and Bulgaria (2000). At the same time, the Kazakh reform has maintained many of the features of the large farm system, particularly in the northern part of the country, that made it popular with rural inhabitants. Salaries constitute a higher portion of the income of rural farming households in Kazakhstan (46 percent) than in Moldova or Bulgaria. About half of this derives from employment in large farms, the other half from non-farm sources. Compare this with Moldova and Bulgaria, where 33 and 34 percent of income derives from salaries. Kazakhstan's large farms also maintain some of the rural service and social benefit functions that were formerly covered by collective farms, in contrast to Moldova and Bulgaria. The more important underlying reason, however, for positive perceptions of land reform may be Kazakhstan's oil boom, revenues from which helped finance the provision of rural services and allowed the government to continue subsidizing unprofitable large corporate farms in the North. It also raised the overall wage level and demand for labor, so that although land reform deprived people of assets, they entered the labor market with relatively higher wages. The combination of three positive factors that ensure that farm households have access to wage income--rural development, maintenance of the large farm system, and rising wage levels-- likely explains why Kazakh farming households do not seem to be more negative about the unequal distribution of land in Kazakhstan or by the lack of government decentralization. Perceived well-being of Kazakh farming households appears to be positively correlated with the portion of salary income. Kazakh farming households note that the level of rural public services has improved since land reform, particularly supply of gas and electricity in rural areas. This is in stark contrast to the changes in rural services seen in Azerbaijan, Moldova 51 and Bulgaria. Both the decline and the level of rural services in Azerbaijan is the worst of those considered here. While some rural municipal services have improved in Moldova, they have severely deteriorated in Bulgaria. There are considerable drawbacks to the course of land reform and farm restructuring in Kazakhstan. Nearly half of corporate farms remain unprofitable and the government supports corporate farms with subsidies and credits. Crop yields on corporate farms stagnate, while those on individual farms continue to improve. An increasing share of agricultural output, and therefore of agriculture growth, comes from family farms. This casts doubt on the government claim that maintaining large corporate farms stresses "efficiency" over "equity." Although the portion of unprofitable corporate farms in Kazakhstan is actually slightly less than in Moldova, in neither country has farm restructuring solved this problem of corporate farm profitability. Kazakhstan's corporate farms also seem distorted in ways that neither Bulgarian nor Moldovan farms are. In contrast to corporate farms in Bulgaria and Moldova, those in Northern Kazakhstan are larger than even the largest farms in the United States. A further drawback to the Kazakh approach to land reform and farm restructuring has been that the enabling environment for agriculture seems to be supportive of large farms, though quite a bit less so for small farms. This fact is emphasized by the World Bank assessment that restructuring government and public institutions to serve the needs of private agriculture is still lacking in Kazakhstan (Figure 15). Thus, it appears that well-being in Kazakhstan may have improved in spite of the land reform process, due in large part to off-farm work opportunities and quality of service delivery in rural areas which the oil boom helped provide. 52 General conclusions and implications for policy This stocktaking has offered a structured and comparative description of much of what is known about land reform and farm restructuring in four countries of the Europe and Central Asia region that have had particular difficulties in land reform, farm restructuring, farm performance or rural poverty. It has not offered an impact analysis of land reform policies in recognition of the difficulties of rigorously establishing causation. However, even assembled facts and comparisons suggest a number of conclusions with implications for policy. Land reform does not seem to have been responsible for the fall in agricultural production and productivity observed in the countries in this survey. The distribution of land in the three CIS countries for the most part followed the decline in gross agricultural output and deterioration in agricultural yields and labor productivity. In Bulgaria a third of the decline in production, half of the deterioration in labor productivity, 17 percent of the decline in crop yields and the entire decline in animal yields preceded the beginning of land restitution. In fact, the fall in agricultural production recorded in the CIS countries in the early 1990s seem to be mainly the result of inherited distortions of the previous era. By this is meant the deteriorating collective farm system, elimination of subsidies, price liberalization and half- way reform. This view is supported by the fact that in each country the beginning of the fall in agricultural output coincided with the deterioration of the collective farm system and the fall continued through the period preceding land distribution. In addition to inherited distortions, the general fall in GDP during this period and the poor enabling environment for agriculture contributed to the fall in production. The deterioration of rural services also preceded land distribution, as can be seen in Table 6 for Azerbaijan. The fall in agricultural production before land reform contrasts with the situation of growth in production and productivity in all the countries surveyed, except possibly Bulgaria, after land restitution and distribution. For most indicators and for most countries performance after land reform began was considerably better than before. In Azerbaijan, there was positive growth in every indicator after land reform began in 1996. These two facts--that agricultural production began to deteriorate before land reform and that production stabilized and began to grow only after land reform--seem to indicate that land reform is more likely a part of the solution than a part of the problem in these countries. In the absence of land reform the deterioration in output that characterized the early 1990s may well have continued, because much of the root of the problem was a deteriorating collective farm system. The choice governments faced in Moldova (1998), Azerbaijan (1996) and Kazakhstan (1998) was not one of rural "developed socialism" of the Brezhnev era vs. land distribution and farm restructuring. It was one of a deteriorating agricultural sector under half-way reforms vs. land distribution and farm restructuring. Thus, it is likely that the counterfactual of no land distribution and farm restructuring would have been continued deterioration. It is not surprising that governments chose reform under these circumstances. Though land reform may potentially contribute to pro-poor growth by increasing farm efficiency and distributing land widely, it is only one of many important complementary reforms and can not be expected to stimulate sustainable pro-poor growth by itself. This survey has illustrated that the transfer of agricultural production from corporate to individual farms in the three CIS countries contributed to improved sector performance, because yields in individual farms were higher than those in corporate farms. This has been 53 the immediate effect of land reform in these countries, but it does not do justice to the potential of land reform in the long run. But land reform is not sufficient by itself to ensure better farm performance. In each of the countries considered a number of complementary policies were identified that shaped the enabling environment for agriculture either positively or negatively. Macroeconomic instability in the early 1990s led to a fall in GDP in each of the countries. For most of the 1990s in Bulgaria, Moldova and Azerbaijan agricultural producer prices were significantly below border prices, resulting in missed opportunities for growth. . These price differences seem to be a result of government restrictions on trade in agricultural commodities. Falling GDP and low producer prices created a poor environment for growth in agricultural yields or production. The macroeconomic and enabling environment for agriculture in the countries considered here improved by the mid- to late 1990s. Inflation rates fell and GDP began to grow. Internal and external agricultural prices grew closer. In Bulgaria both the macroeconomic and enabling environment improved after 1997/98. In Moldova the macroeconomic record improved after 2000, but the enabling market and public support for agriculture is still poor. In Azerbaijan the macroeconomic environment improved after 1996, though the enabling environment for agriculture remains poor. In Kazakhstan the macroeconomic environment improved after 1996, but the enabling environment for agriculture has improved mostly for large farms. The favorable macro-environment stemming from the oil boom is having a large, positive effect on the well-being of rural households that likely more than compensates for the incomplete land reform. None of the governments of the countries covered in this survey have met the challenge of ensuring a truly good and sustainable enabling environment for agriculture to ensure that farms will be competitive in world markets. Bulgaria has gone the furthest in ensuring an enabling environment for agriculture. However, there is no evidence to indicate that Bulgarian corporate farms have been forced to reduce labor rolls in order to reduce costs of production, as can be observed in the competitive corporate farms of Central Europe. In Moldova and Azerbaijan producers seem to be taxed by internal and external trade barriers and ad hoc interventions by the government on agricultural markets. In Kazakhstan, enabling policies seem to favor large farms over small. The lack of a sustainable enabling environment for agriculture in the CIS countries has two sides. First, governments have failed to take steps toward restructuring government and public institutions to serve the needs of private agriculture. For small farms increasing competitiveness is often connected with increasing size to that of mid-sized farms, increasing non-labor inputs, new technology and better management methods. For large farms improvements in competitiveness usually concern reductions in staff, reducing farm size, introducing non-labor inputs, new technology and better management methods. Government policies should facilitate these changes by ensuring that land lease markets operate easily, that farmers have access to advisory support services and finance, that farms operate in a competitive environment where there is a credible threat of bankruptcy, soft budgets are eliminated, etc. Rural development policies, such as maintenance of rural public services, pensions, safety nets, and infrastructure, as well as support to small and medium businesses are important as well in order to make rural areas better places to live and do business. Second, government policies instead aim to support farm enterprises directly with loose credits or state support, by eliminating the possibility of bankruptcy, by restrictions on marketing and employment policies. These policies usually concern corporate and large 54 farms, because they are the most visible, have the most employment and their managers often have close links to government. Such farms themselves usually lobby for such support. In the Czech and Slovak Republics and Hungary, many corporate farms have improved their performance, such that they perform as well as family farms. However, this achievement required a sustained policy environment of complementary reforms which are quite challenging for governments particularly in CIS countries. There are perhaps three complementary reforms that have facilitated better performance of corporate farms in these countries. First, there seems to have been a true break with soft budget policies, such that the government does not favor large corporate farms with subsidies, easy credit programs, marketing restrictions, bankruptcy policies or other special treatment. Second, in the Czech and Slovak Republics there are expensive rural pensions and unemployment programs to support agricultural labor that has been laid off from large corporate farms. These non-farm income sources both offer an incentive to leave farming and compensate for earnings when workers are laid off. This is why labor can be shed from corporate farms in these countries without local authorities and ex-workers raising havoc. Third, corporate farms in these countries are interested in reducing costs of production in order to remain competitive because they have no choice. They must compete on European markets with Western European producers with low costs of production or they do not survive. Even before the Czech and Slovak Republics were part of the European Union, both the governments and corporate farm managers knew accession was coming and farms adjusted their behavior to these circumstances. These complementary reforms have proven difficult to reproduce in the CIS countries and other poor countries, particularly if they are not in line for EU accession. At the present time they do not seem very realistic for some of the countries covered in this survey. In Bulgaria, the soft budget condition, the competition condition and the pension and social support condition seem to be real possibilities, though they have perhaps not been realized to the degree they have in the Czech Republic. In Moldova, the soft budget condition seems to have been fulfilled to some extent, though neither the pension/social support condition nor the competition condition has been met. In Kazakhstan, none of the three conditions seem to have been met. Since the government does not facilitate the kind of changes corporate farms require to increase their competitiveness, there are reasons to believe that corporate farms there will not perform as well as do family farms. In fact, the World Bank survey showed that in Kazakhstan as well as in Azerbaijan, the total factor productivity of family farms was consistently higher than corporate farms. Total factor productivity and profitability are better overall indicators of performance than yields, because they better measure the ability of the farm to control costs. Better performance of the agriculture sector in these countries depends on both changing government policies toward corporate farms and on the continued formation of mid-size family farms in these countries. In Kazakhstan there is need for both types of policies. These conditions are not met in Azerbaijan either. The corporate farm sector in Azerbaijan is quite small, however, so the emphasis in that country should be on facilitating the formation of mid-size family farms. In Moldova and Bulgaria, much more progress has been made on complementary reforms, though these countries have certainly not enacted the same policies as in the Slovak and Czech Republics. There is therefore reason to believe that differences in the performance of corporate and family farms due to government policies may not be important in these 55 countries. Unfortunately, evidence from the World Bank farm survey on total factor productivity in these countries was inconclusive. The predominant farming technology is also of critical importance for the ability of land reform to foster pro-poor growth. We know from the experiences of China and Vietnam that land reform by itself can have a major impact on productivity and incomes, in particular in economies with labor intensive farming and where land is a relatively scarce commodity.20 The shift to individual farms can yield substantial incentive benefits and better labor governance that outweigh relatively modest losses in scale economies. These effects are most likely to emerge if land is given in kind in clearly delineated plots to rural households. These factors drove the rapid gains in productivity in countries such as China and Vietnam and later in Albania. These documented results of land reform lead us to believe that the same factors should apply in Azerbaijan, Moldova and southern Kazakhstan. In labor intensive agricultural systems, such as Azerbaijan and Moldova, there are important equity benefits to land distribution as well, because employment in agriculture is typically nearly universal and the egalitarian distribution of land therefore creates widespread benefits to the rural, often poor, population. In less labor intensive agricultural systems, such as Bulgaria and northern Kazakhstan, the incentive gains of individual farming are still important, but economies of scale are also key. There are large efficiency costs to fragmentation of farm holdings and the lack of access to finance and capital technology of small-scale farming is more costly in such an environment. Hence, privatization of land by itself may not result in strong and widespread rural income growth. In the absence of mitigating factors, the privatization of farms in less labor intensive agricultural systems should also have different equity results. The potential gains from mechanization should induce privatized large farms to gain efficiencies by laying off surplus workers, as was the case in Central Europe. The lay-off of low skilled farm workers will cause extensive rural unemployment and increase rural poverty, unless there is either a strong social welfare system ­ as in some countries in Central Europe ­ or alternative employment. In countries such as the Czech Republic and Slovakia restitution worked relatively well, because in these countries less people were still employed in agriculture and the countries were much richer. Bulgarian land restitution falls between the path of the `labor-intensive-land-distribution' model of poorer countries and the `capital-intensive-high-social-security' model of Central Europe. In rural areas restitution allocated land to older households, which were least able to start up large-scale family farms and which had few opportunities for alternative employment. Without significant welfare benefits or alternative employment, income and poverty problems of the rural population in Bulgaria were particularly bad, particularly since a number of unemployed rural households did not have access to land. Hence, in such an environment the availability of alternative employment opportunities is crucial. In these conditions, the most dynamic and able migrated to the cities, leaving the countryside disproportionately populated by older and low skilled people. In many countries, including the Russian Federation, Ukraine and Kazakhstan, there are mitigating factors that often prevent privatized large farms from gaining efficiencies by 20Rozelle and Swinnen (2004). 56 laying-off surplus workers. These may be explicit or implicit state (central or local) policies to prevent rural unemployment, rent seeking by large farms that encourage them to maintain large numbers of employees, a sense of community obligation by management to maintain employment or soft budget constraints, to name a few. These policies are not absolute. There are corporate farms in each of these countries that have restructured, improved their performance, shed workers, and incorporated new capital and management, often as a result of being bought out or taken over by outside owners. However, we found no evidence in Kazakhstan of the widespread labor shedding that took place in Central European corporate farms, a key indicator of substantial farm restructuring. Northern Kazakhstan, therefore, provides a slightly different model of land reform than is found in Central Europe and Bulgaria. In Northern Kazakhstan there would be large efficiency costs to fragmented farms, because such farms would encounter significant problems related to access to finance, capital and marketing channels. These added difficulties in such an environment argue for the importance of larger farms that are vertically coordinated with processors and traders in order to ensure such access. In Kazakhstan the issue of scale economies is used to justify and support the maintenance of vertically coordinated corporate farms that are far larger than such considerations would merit many of which operate at a loss. An average corporate farm in Kazakhstan in 2002 was 12,000 hectares in size, far larger than the largest category of farms (by size) in the United states (798 hectares). Farms of such size would normally be expected to suffer from extreme diseconomies of scale connected with difficulties of governance. This hypothesis seems to be borne out by the profit and technical performance of such farms. The subsidies available to such farms address the effects of poor performance rather than the causes. Moreover, they tend to create a problem of moral hazard that would not seem to improve performance. We also learned from the Chinese land reforms that it is not necessary to have full privatization of land to get important efficiency gains. In both the Chinese and Vietnamese land reforms use rights were allocated individually through lease contracts, which was sufficient to ensure large incentive effects. On the contrary, in most CIS countries under "share privatization" use rights were not linked to specific plots of land. This key difference in the land share allocation system allowed those in charge to abuse the land reform and contributed to a very unequal land ownership structure. Though most CIS countries have moved away from "share privatization," those that did not distribute land widely continue to maintain a highly unequal land distribution pattern. In Kazakhstan, for example, nearly 60 % of farm land is locked into corporate farms, many of which would probably not be financially viable in a less administratively controlled economy. Raising the welfare of rural residents is about raising labor productivity, . . . It is well known that there is a strong negative correlation between the portion of the labor force employed in agriculture and GDP and rural incomes. The "agricultural transition" is about how rural incomes and GDP increase as agricultural employment decreases. Survey data on disposition of land suggest that key factors in raising rural incomes are non-farm employment opportunities and rural pensions. Not only do these provide additional income to rural farming households, but they tend to reduce agricultural employment. The macro-story also matters, as evidenced by the impact of Kazakhstan's oil boom on government revenues, and the consequent positive impact on consumer demand, increased wages, resumption of rural services, and rural perceptions of well-being. 57 Information on changes in income and non-income measures of well being of households in Azerbaijan suggest that households assess their well-being by considering more than income. For instance, Azerbaijan had the best sector performance of any of the countries considered. Yields improved, production increased and rural poverty fell. However, households were quite pessimistic (compared to other countries) as to changes in their well-being with only 18 percent of them believing that well-being had improved over the past three years. One key to this disparity is the substantial deterioration in rural services in Azerbaijan compared to urban areas. Another apparent reason is that fully two thirds of incomes in Azeri households derived from farming and only 11 percent from wage employment. This portion of income from farming is a considerably higher portion than that found in the other countries. This risk aversion may explain why households prefer to maintain employment in large farms, instead of becoming commercial farmers themselves. It is also why the creation of non-farm employment in rural areas is so important. . . . the predominant farming technology. . . The propensity of households to farm their land also appears to depend on the labor intensity of the farming environment. In labor intensive agricultural environments those households that farmed land received during land reform earned higher incomes. Thus, in Azerbaijan and Moldova most households farmed at least some of the land they received. In less labor intensive farming environments such as northern Kazakhstan or Bulgaria, however, pensions and non-farm income seem to play a greater role. In Kazakhstan, where those who did not farm land had large salary income that more than compensated for sales of agricultural products, families that used land actually had lower overall incomes on average. In Bulgaria pensioners could do nearly as well by collecting their pensions, and leasing out their land as by farming the land received from land restitution. We did not control for other factors in making this judgment, so it is not robust. However, it certainly suggests that rural pensions and non-farm employment opportunities are key factors for agricultural policy in these countries. . . . and rural services. In this survey of land reform and farm restructuring it has been shown that the deterioration of the collective farm system also implied a deterioration of rural public services. The renovation of these services depends critically on the establishment of financially viable local government. No country has solved the problem of public funding for local government. In general, although the experience of both developed and transition countries is that local rural services can not be supported by local taxes, no country has been able to develop the political will within the government to make rural development and maintenance of rural services a high priority. Certainly, this is an area where donors could assist in the set up of working local government institutions. However, the operation of local government is something that can not be carried out by donors. There needs to be a need felt within the government for development of this matter, something which seems to have yet to occur. Thus, raising the welfare of rural residents requires assistance from the government in the form of rural development, rural pensions and social support. In addition to ensuring an enabling environment for private agriculture, if the government is interested in raising the welfare of rural residents, one of its roles should be to assist the transition from high employment, low wage agriculture to low employment, high wage agriculture. This can be done through rural development, rural pensions, social support for those shed from corporate farms, and other social services. It could also be accomplished by assisting young people in acquiring skills for alternative employment. Kazakhstan clearly illustrates the significance of 58 government support for rural development, pensions and social support on the welfare of rural residents, even when the enabling environment for private agriculture is weak. Legislation and procedures that appear gender neutral because they do not make a distinction between the rights of men and women may nevertheless affect men and women in very different ways, given how traditional gender relations and stereotypes affect access to information, resources, and power. Thus, legislation as well as administrative procedures for establishing rights may need to involve special outreach to women. . . . Female-headed households in each of the countries surveyed used less land, had lower perceived well-being and were more likely than male-headed households to believe that their well-being had deteriorated in the past three years. Though female-headed households owned about the same amount of land as male-headed households in all countries, they were likelier than male-headed households to rent out land, and on average, they used significantly less of the land received from privatization than did male headed households. It is not completely clear why these differences exist, but qualitative interviews suggest that although formal legislation and procedures are largely gender neutral in all four countries, women's access to information and legal recourse is substantially lower than men's. Likewise, female headed households may be less well-positioned to use land beyond the household plot for a combination of reasons: less labor-power, less access to heavy equipment, and heavier household responsibilities. . The deterioration of rural service provision has increased women's child and elder care responsibilities, thereby increasing their domestic workload and making it harder for them to enter the labor market. . . . Thus, if women are to benefit from growing opportunities in farm and off-farm opportunities, governments will have to pay attention to providing adequate social services, and thereby reducing some of the barriers that women, in particular, experience. 59 Annex I: Four-Country Tables and Figures Annex I Table 1. Six Components of Governance, 1996, 1998, 2000 and 2002 Country Income Dataset Voice and Political Government Regulatory Rule of Control of Category Accountability Stability Effectiveness Quality Law Corruption Percentile Percentile Percentile Percentile Percentile Percentile Rank Rank Rank Rank Rank Rank (0-100) (0-100) (0-100) (0-100) (0-100) (0-100) Azerbaijan Low 2002 19.2 18.4 13.9 22.2 24.2 9.8 Income 2000 24.6 25.5 17.4 33.0 11.9 6.5 1998 19.9 25.5 22.4 13.0 20.5 5.5 1996 18.8 26.8 10.6 9.4 18.1 16.7 Bulgaria Lower 2002 66.7 64.3 56.2 69.6 56.7 52.6 Middle 2000 63.4 57.6 50.5 56.2 57.8 54.9 Income 1998 61.8 61.8 12.0 65.8 53.0 39.9 1996 58.1 54.9 35.8 45.3 56.0 29.3 Kazakhstan Lower 2002 17.7 62.2 21.6 24.2 18.6 10.8 Middle 2000 20.9 58.2 32.1 26.5 23.2 19.0 Income 1998 28.8 57.0 23.5 32.1 21.6 13.1 1996 20.9 45.7 17.3 34.8 24.7 22.7 Moldova Low 2002 40.9 40.5 30.4 49.5 39.2 21.6 Income 2000 52.4 43.6 13.0 12.4 38.4 19.6 1998 49.7 47.3 31.1 31.0 55.1 38.3 1996 44.5 37.2 32.4 53.6 48.8 50.7 Czech Upper 2002 74.7 84.9 73.7 82.0 73.2 68.6 Republic Middle 2000 77.0 77.6 75.0 75.7 73.0 72.3 Income 1998 83.2 81.2 80.3 76.1 73.5 73.2 1996 79.6 85.4 81.6 86.7 73.5 77.3 Source: Kaufman, Kraay and Mastruzzi (2003). Percentile rank indicates the percentage of countries worldwide that rate below the selected country. Annex I Table 2. Age structure of rural population in Bulgaria, Azerbaijan, Kazakhstan and Moldova Share of rural population Year Country Of retirement age Azerbaijan 9 2000 Kazakhstan 11 1998 Moldova 18 2001 Bulgaria 28 1999 Sources: Statistical Committee of the CIS (2003b); Agentstvo Respubliki Kazakhstan po Statistike (1999); Department of Statistics and Sociology of the Republic of Moldova (2002); OECD (2000). 60 Annex I Table 3. Disposition of land in surveyed households Azerbaijan Bulgaria Kazakhstan Moldova Received land during land 98.01 60.34 37 94.78 reform (%) Amount of land received 2.03 1.56 18.37 2.31 during land reforms (ha) Total amount of land owned 2.21 1.62 22.54 2.51 (ha), of which Household plot near house 0.23 0.05 0.09 0.17 (ha) Household plot in different na 0.07 na part of village (ha) Farming land (physical 1.96 1.56 na 0.25 plot; ha) Land represented by land na 18.37 1.94 share of former kolkhoz / sovkhoz farm (ha) Conditional land share (ha) na 3.83 na Other (ha) 0.01 0.01 0.19 0.15 Total amount of land used (ha), 2.59 1.68 1.72 1.51 of which Private land (bought or 1.71 1.43 1.40 1.23 inherited; ha) Leased land (ha) 0.75 0.14 0.24 0.06 Household plot (ha) 0.22 0.05 0.08 0.20 Land used that is not owned 0.02 0.00 0.00 0.00 or leased (ha) Other arrangements (ha) 0.00 0.07 na 0.01 Use of land received during land reforms (% of households) Use it myself 81.66 37.92 14.41 97.46 Leased it out to large farm 1.02 23.88 15.77 37.71 enterprise Leased out to cooperative na 42.13 na na Use it jointly with the na 8.99 na na cooperative/farm enterprise Leased it to other entity or 8.88 na 0.45 0.85 individual Left it unused 16.3 8.43 23.87 1.27 Left it for someone else to 0.58 2.81 43.24 0.21 use it without payment Sold it 0.44 4.49 2.7 0.85 Other 0.15 0.84 1.8 0 Leasing land in (%) 4.27 3.53 10.5 4.21 Leasing land out (%) 9.53 40.5 6 38 Land allocation fair (%) 91.75 56.47a 59.83c 53.11 Source: World Bank survey of farms (2003). 61 Annex I Table 4. Employment in agriculture, 1991-2001 (% of total employment) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Azerbaijan 32 35 32 32 31 32 29 42 42 41 40 Bulgaria 20 21 22 23 24 24 25 26 26 26 26 Kazakhstan 23 24 25 22 22 21 24 22 22 Moldova 42 40 43 46 .. 43 42 46 49 51 51 Estonia 20 19 17 15 11 10 9 9 8 7 7 Hungary 16 11 9 9 8 8 8 8 7 7 6 Czech Republic 10 8 8 7 7 6 6 6 5 5 5 Slovak Republic 13 12 12 10 9 9 9 8 7 7 6 Source: World Bank World Development Indicators, 2004. 62 Annex I Table 5: Productivity measures for surveyed farm enterprises by size category (hectares) Country <5 <10 10-50 50-100 100-200 200-500 >500 All Azerbaijan Observations (N) 17 26 10 9 12 6 80 Of which: Family farms 13 22 10 7 9 4 65 Of which: Corporate farms 4 4 0 2 3 2 15 Output per AWU (1000 LCU) 4,641 6,473 5,015 19,686 3,689 7,298 7,032 Output per ha (1000 LCU) 3,227 1,384 1,548 1,920 237 110 1,589 Value of ag production to total 2.1 1.8 1.6 2.9 2.1 2.3 2.1 costs Kazakhstan Observations (N) 22 22 12 35 52 57 200 Of which: Family farms 22 18 11 34 48 45 178 Of which: Corporate farms 0 4 1 1 4 12 22 Output per AWU (1000 LCU) 163 400 359 505 1,081 1,102 767 Output per ha (1000 LCU) 242 152 68 21 17 10 58 Value of ag production to total 5.1 3.2 4.0 4.0 4.6 4.0 4.2 costs Moldova Observations (N) 133 26 21 2 4 6 8 200 Of which: Family farms 129 26 20 1 0 0 0 176 Of which: Corporate farms 4 0 1 1 4 6 8 24 Output per AWU (1000 LCU) 13 12 15 3 32 11 20 13 Output per ha (1000 LCU) 20 8 6 1 3 4 3 15 Value of ag production to total 7 3 2 2 2 2 1 5 costs Bulgaria Observations (N) 15 7 2 4 8 21 57 Of which: Family farms 15 6 2 0 0 0 23 Of which: Corporate farms 0 1 0 4 8 21 34 Output per AWU (1000 LCU) 6 17 8 8 16 46 24 Output per ha (1000 LCU) 4.34 1.91 0.37 0.37 0.47 0.58 1.69 Value of ag production to total 4.1 1.2 1.1 2.0 11.2 5.2 4.9 costs Source: World Bank survey of farms (2003). 63 Annex I Table 6. Farming household perceptions of enabling environment and well- being Variable Azerbaijan Bulgaria Kazakhstan Moldova Perceived enabling environment for farming Combined rating (0: very 39.65 32.07 49.18 47.40 bad; 100: very good) Today: Perceived ease to ... (0: very difficult; 100: very easy) Market agricultural 42.28 29.30 52.94 42.72 produce Purchase land 34.00 28.05 37.15 45.75 Sell land 40.58 34.08 41.07 49.75 Rent in land 38.62 33.48 45.36 50.50 Lease out land 43.10 45.31 45.44 50.75 Access inputs (seeds, 29.62 38.87 56.72 54.36 fertilizer, pesticides) Access agricultural 30.73 30.12 50.08 52.70 equipment Access satisfactory 36.52 21.74 47.95 15.10 irrigation Access satisfactory advisory 46.59 35.24 57.85 56.26 services Access veterinary services 50.89 44.07 68.48 59.92 Access pasture land 54.02 32.76 58.78 50.60 Access a loan for farm 28.84 11.50 28.59 40.50 investments Perceived level of well-being Current level of well-being (%) High 14.08 5.71 30.83 14.40 Medium 64.58 25.71 46.33 50.20 Low 21.34 68.57 22.83 35.40 Change in perceived level of well-being over last three years (%) Improved 17.64 9.92 36.17 28.60 Unchanged 78.52 54.45 36.5 48.20 Deteriorated 3.84 35.63 27.33 23.20 Source: World Bank survey of farms (2003). 64 Annex I Table 7. Surveyed households and farm enterprise rating of the enabling environment for farming Ease to AZ AZ BG BG KZ KZ MD MD HH ENT HH ENT HH ENT HH ENT Market agricultural produce 42 55 29 42 53 56 43 47 Purchase land 34 33 28 52 37 41 46 51 Sell land 41 62 34 40 41 38 50 51 Rent in land 39 44 34 59 45 53 51 57 Lease out land 43 67 45 46 45 49 51 53 Access inputs (seeds, fertilizer, 30 60 39 59 57 48 54 56 pesticides) Access agricultural equipment 31 48 30 55 50 45 53 60 Access satisfactory irrigation 37 55 22 29 48 51 15 10 Access satisfactory advisory 47 72 35 59 58 61 56 57 services Access a loan for farm 29 28 12 26 29 46 41 44 investments Average 37 52 31 47 46 49 46 49 Correlation coefficient between 0.69 0.69 0.62 0.99 household and farm enterprise rating Note: Index between 0 and 100. 0: very difficult; 100: very easy. Values 33 are bolded. Farm enterprises include family farms and corporate farms. Source: World Bank survey of farms (2003). Annex I Table 8. Income composition of surveyed households Percent in total income (cash and in kind) AZ BG KZ MD Total salary from wage employment 10.6 34.0 45.7 32.7 Value of farm production consumed in the family 27.4 8.9 12.9 18.5 Sales of farm products 36.3 4.9 9.2 21.7 Rent/lease payments received (for land and assets) 0.4 3.1 0.3 3.7 Total revenue from other private non-farm 2.2 2.6 1.5 1.6 business Pensions 14.1 32.0 22.9 13.6 Social assistance 1.4 9.3 2.1 1.0 Gifts and remittances 0.7 2.2 0.6 4.1 Other 6.9 2.7 5.7 3.8 Source: World Bank survey of farms (2003). 65 Annex I Table 9. Socio-demographic profiles of surveyed households with low / high perceived levels of well-being Azerbaijan Bulgaria Kazakhstan Moldova Perceived level of well-being Perceived level of well-being Perceived level of well-being Perceived level of well-being Variable LOW HIGH Stat. LOW HIGH Stat. LOW HIGH Stat. LOW HIGH Stat. sign. sign. sign. sign. Share in sample (%) 21.34 64.58 *** 68.57 5.71 *** 22.83 30.83 *** 35.40 14.40 *** Household size (number of 5.03 4.82 3.53 4.06 * 3.78 4.08 3.60 3.68 individuals) Age of household head 53.27 54.30 56.24 51.24 * 51.93 47.74 *** 51.53 48.63 * (years) Higher educated household 8.00 18.18 ** 1.96 8.82 *** 8.76 22.7 *** 12.43 34.72 *** heads (%) Female headed household 22.00 12.12 ** 15.20 17.65 *** 37.96 17.84 *** 18.08 11.11 ** heads (%) Ethnic group (%) Azeri 50.00 75.76 *** Bulgaria 71.67 100.00 *** Kazakh 49.64 68.11 *** Moldovan 92.66 88.89 n Russian 0.00 0.00 Turkish 6.65 0.00 Russian 32.85 27.57 Ukrainian 4.52 2.78 Talish 46.00 19.19 Roma 20.44 0.00 Ukrainian 5.84 1.08 Russian 0 0 Tat 1.33 1.01 Other 1.23 0.00 German 1.46 1.08 Gagauz 0.56 0 Lezgi 2.67 4.04 Tatar 1.46 1.08 Other 2.26 8.33 Belorussian 2.19 0 Uigur 4.38 0 Other 2.19 1.08 Region (%) North- 29.33 37.37 *** Pleven 35.54 32.35 *** Almaty 43.07 10.27 *** CAHUL 18.64 26.39 *** East Central 9.33 21.21 Plovdiv 28.92 58.82 Pavlodar 28.47 15.68 FLORES 27.68 18.06 TI South- 50.00 20.20 Dobrich 35.54 8.82 Akmola 4.38 50.27 NISPORE 10.17 36.11 East NI North- 11.33 21.21 West- 24.09 23.78 ORHEI 40.68 12.5 West Kazakhstan TARACLIA 2.82 6.94 Asterisks mark significant differences. ***, **, * differences are significant at 1%, 5%, 10% significance level. AWU: annual working units. Source: World Bank survey of farms (2003). 66 Annex I Table 10. Portion of households perceiving land allocation as fair, and reasons for unfair land allocation AZ BG KZ MD Land allocation was fair (% of households) 91.8 56.5* 59.8* 53.11 Reasons for unfair land allocation (% of responses from those households that considered it as unfair) Parcel was smaller than it should have been 19.3 5.1 5.7 9.6 Parcel was smaller than others received 11.4 na 5.4 9.0 Parcel is of poorer quality than others received 20.5 na 5.4 12.7 The process cost more than it should have 14.8 7.4 10.8 3.1 I was not fully informed of my rights 11.4 11.6 27.6 15.3 The titling officials were not available/willing to answer 6.8 4.2 15.7 18.8 questions Plot received for cultivation does not correspond to the 2.8 13.0 6.2 5.8 parcel for which I have ownership rights as documented in land title The restitution of land in real borders fragmented the land na 30.7 na na and now it is more difficult to sell and lease Land fragmentation na na na 12.5 Parcel is of poorer quality than it should have been na 24.2 na na Authorities took good land na na 7.3 na Our household / many people have not received land na na 8.4 5.5 Other 13.6 3.8 7.3 6.8 * 23.4% of Bulgarian and 5.5* of Kazakh households did not answer this question. Source: World Bank survey of farms (2003). Annex I Table 11: Profitability of Agricultural Enterprises in Azerbaijan, Kazakhstan and Moldova, 1990-2002 1990 1994 1995 1996 1997 1998 1999 2000 2001 2002 Azerbaijan Percent unprofitable 7.9 32.0 47.0 62.1 75.0 86.7 70.5 52.5 35.7 29.0 Profitability, all products 31.6 8.9 -4.7 -17.8 -43.4 -40.7 -26.4 -14.6 1.1 1.4 Profitability, crops 41.3 18.1 3.2 -7.7 -44.4 -39.5 -20.9 -7.0 14.7 17.8 Profitability, livestock 3.3 -25.2 -36.8 -41.2 -47.4 -51.6 -43.4 -23.2 -5.7 -3.1 Kazakhstan Percent unprofitable 78.5 72.4 78.5 49.5 51.6 51.9 48.9 Profitability, all products -23.5 -20.9 -25.7 14.6 19.8 14.6 7.0 Moldova Percent unprofitable 28.0 67.0 46.0 91.0 72.0 56.0 57.0 Profitability, all products 11.2 -10.3 0.1 -40.1 -20.6 -9.7 -3.6 Profitability, crops 8.8 1.4 3.3 -18.4 16.3 22.8 19.5 Profitability, livestock -33.0 -39.4 -42.3 -28.7 -19.3 -6.7 9.4 Sources: State Statistical Committee of the Republic of Azerbaijan (2003); Agentstvo Respubliki Kazakhstan po Statistike (2003); Department of Statistics and Sociology of the Republic of Moldova (2003). 67 Annex I Table 12: Households' level of satisfaction with provision of electricity, gas, drinking water, telephone Azerbaijan Bulgaria Kazakhstan Moldova Present level of Before2) Today Before2) Today Before2) Today Before2) Today satisfaction1) with service Electricity 84.1 43.7* 91.9 71.6* 68.1 86.2* 73.0 79.0* Gas 18.4 3.5* 30.6 33.4 65.2 78.5* 35.7 37.7 Drinking water 68.9 66.7 89.6 75.7* 70.0 72.6 42.5 38.6 Telephone 25.8 30.2* 79.6 65.3* 48.2 55.0* 35.4 50.8* A star behind the value in the "Today" column indicates that the satisfaction levels before and today are statistically significant at the 10% level. 1) Level of satisfaction is expressed on a scale from 0 to 100 (0=not available at all; 100=always available in satisfactory quality / reliability). 2) "Before" means before the dismantling of the sovkhoz (state farm) or kolkhoz (collective farm). Source: World Bank survey of farms (2003). Annex I Table 13: Percentage of households with access to social benefits before dismantling of the sovkhoz / kolkhoz farms and today Azerbaijan Bulgaria Kazakhstan Moldova Percentage of Access Access Access Access Access Access Access Access households benefiting before1) now before1) now before1) now before1) now from Compensation for price 1 0 27 22 1 1 1 2 increases Pension augmentation 35 63 38 67 11 34 17 29 Children allowances 69 62 76 67 23 11 14 9 Subsidized 12 2 65 44 6 2 8 4 childcare/preschool subsidies School subsidies 41 36 67 45 6 2 6 3 Stipends for college and 32 30 48 35 16 4 13 7 university students Help with housing 2 0 24 7 14 3 1 1 construction and repair Heating fuel 0 15 15 39 23 14 6 4 Food at subsidized prices 0 0 13 6 6 3 10 3 Help with purchase of 1 0 28 27 5 0 0 0 manufactured goods Subsidized utilities 8 0 13 15 9 1 4 5 Medical care 93 53 89 20 55 46 65 46 Subsidized vacation 1 1 49 3 22 4 43 19 Enterprise housing 25 3 12 4 14 2 2 1 Public transportation 40 38 86 77 34 22 41 28 1) "Before" means before the dismantling of the sovkhoz or kolkhoz farm. Source: World Bank survey of farms (2003). 68 Annex I Table 14: Households' perceptions on community life Azerbaijan Bulgaria Kazakhstan Moldova Level1) Level1) Level1) Level1) Level1) Level1) Level1) Level1) before2) now before2) now before2) now before2) now Alcohol use among 38 28 41 60 49 65 41 62 adults Alcohol use among youth 44 37 28 71 43 64 33 62 Level of crime 29 25 22 78 38 57 31 49 Criminal activity among 28 25 19 76 35 54 30 51 youth Domestic abuse/violence 28 26 20 40 27 39 30 45 1) Level on a scale from 0 (very low) to 100 (very high). 2) "Before" means before the dismantling of the sovkhoz or kolkhoz farm. Source: World Bank survey of farms (2003). Annex I Table 15: Structure of gross agricultural production by category of farm, 1991, 2002 (percent) Country Agricultural enterprises Household plots and private farms 1991 2002 1991 2002 Azerbaijan 56 2 44 98 Kazakhstan 68 22 32 78 Moldova 75 29 25 71 Sources: Statistical Committee of the CIS (2001, 2003a). Annex I Figure 1: Percentage of surveyed male- and female-headed households stating that well-being has improved (left) or deteriorated (right) over last three years % 100 100 90 90 80 80 70 70 60 60 46.2 50 50 38.3 38.8 40 34.7 33.3 40 28.6 28.8 27.0 30 23.5 21.7 30 18.5 20 20 14.4 10.9 10 4 3.4 10 3.1 0 0 AZ BG KZ MD AZ BG KZ MD Male headed households Female headed households Male headed households Female headed households Note: AZ indicates Azerbaijan, BG, Bulgaria, KZ, Kazakhstan and MD, Moldova. Source: World Bank Survey, 2003. 69 Annex I Figure 2: Aggregate, corporate and individual farm livestock yields in Moldova, 1990-2002 300 250 200 yields k oc Individual farms estvli 150 Corporate farms of Aggregate yield ndexI 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Sources: Statistical Yearbooks. 70 Annex II: Background Information on World Bank Survey of Farms, 2003 With the assistance of local research firms21, surveys of households and farm enterprises were conducted in Azerbaijan, Bulgaria, Kazakhstan, and Moldova. In each country save Kazakhstan a two-stage sampling design was used. In the first stage, the main farming system zones in the country were identified and representative districts were selected from these main zones. Though the type of agriculture practiced was the most important factor in the identification of these zones, there was also an effort to ensure coverage of a variety of farm types, different degrees of poverty and various degrees of isolation. It was also important to avoid a sample with one predominant social or ethnic group (see Annex II Table 1). In the second stage, communities were supposed to be randomly selected from which farms and households were then randomly selected. In Kazakhstan, main farming system zones in the country were identified and representative oblasts were selected from these main zones. In a second stage, raions in each oblast were to be randomly selected, and in the third stage communities were to be randomly selected, from which farms and households were randomly selected. The country-level representativeness of the World Bank surveys in these countries rests on how well the survey regions reflect the main farming systems in the countries, how scrupulously the survey firms implemented random selection and on the size of the sample. Though efforts were made to ensure representativeness, it was not possible to monitor the surveys with sufficient precision as to be certain. To be conservative, then, it can be stated that the findings of the survey are representative only within the selected regions. Annex II Table 1: Sample of World Bank Farm Restructuring Survey 2003 Azerbaijan Bulgaria Kazakhstan Moldova Districts / oblasts covered Districts Pleven, Oblasts Almaty, Districts Orhei, Khachmaz, Plovdiv, Akmola, Nisporeni, Shemaki, Dobrich Pavlodar, Floresti, Imishly, West Cahul Sabirabad, Kazakhstan Taraclia Lenkoran, Masally, Khanlar, Tovuz Number of household 703 598 600 500 surveys Number of farm enterprise 80 57 200 200 (farm manager) surveys Farm enterprise questionnaires were administered to farm managers of peasant farms, heads of individual farm enterprises, and managers of corporate farms. Households, defined as rural households engaged in farming without being formally registered were administered separate questionnaires. The difference between farm managers and households was based solely on registration, rather than on the size of the farm. Sampling procedures for households and farm enterprises differed between countries because of country-specific constraints related to availability of lists from which to draw samples.22 21Azerbaijan: Synergetics, Bulgaria: Agency for Socioeconomic Analyses (ASA), supported by Blackstone (Canada); Kazakhstan: Bisam; Moldova: Agency for Restructuring Agriculture (ARA). 22Technical pre-survey and after survey notes by each research firms describe the quantitative research design, sampling selection, fieldwork and data management. They can be made available upon request. 71 The household survey covered the socio-demographic household profile and time allocation of households; land ownership and land transactions; agriculture production and marketing; inputs and equipment for farming, and access to information; farm investments and finances; subjective ratings about well-being and perceived changes in the enabling environment for farming; household income, expenditure, and living standards.23 There are two important biases in the sample of households gathered for Bulgaria and Kazakhstan. Because of the limited nature of land restitution in rural areas of Bulgaria, the sample of households there differed from the samples in the CIS countries. Whereas in the CIS countries, over 95 percent of households surveyed had land and were engaged in some sort of farming activity, in Bulgaria, 23 percent of households surveyed had no land and were not engaged in farming activities. For Kazakhstan there is an important bias in the household sample in that only rural households that engaged in farming were surveyed. These sample biases undoubtedly affect the household survey results, though the implications are not clear. The Bulgarian household survey results reflect the opinion of the rural rather than farming population. The Kazakh household survey results, on the other hand, reflect the opinions of the farming rather than rural population. Because the rural and farming populations coincide in Moldova and Azerbaijan, the survey results there reflect both rural and farming populations. The farm enterprise survey covered the same land and farm related questions as the household questionnaire, but at a greater level of detail for many of the questions. It also asked about perceived changes in the enabling environment for farming and about subjective ratings on farm profitability. Semi-structured interviews were carried out with men and women in a sub-set of the surveyed households to further explore issues addressed in the household surveys. Gender stratified focus groups composed of similarly diverse participants were organized in each region to examine gender issues, map the assets and resources of the community, and discuss community dynamics. Finally, key informant interviews were used to get more in-depth information about specific topics, and to explore differences of perceptions and contradictory interests among different stakeholders, including mayors, other local officials, farmers and other rural entrepreneurs, agricultural officials, social service providers, including medical and educational personnel; civil society organizations including religious leaders, informal leaders; representatives of women's organizations, and so forth. 23Findings from the household data set about access to land, and land ownership, must be interpreted with caution. 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