Optimal scenario for land reform

Original source : ZN.ua“Оптимальный сценарий земельной реформы”

The sale of land will save crop yields and become the driver of GDP growth, if it is carried out according to the optimal scenario.

Due to the low level of fertilizer use since 2000, the humus content in soils has decreased from 3.36 to 3.14%. At the same time, lands with humus content below 2.5% are not considered black soil. And since 65.1% of all leased land is transferred for short-term use for a period of up to ten years, this does not motivate tenants to preserve fertility. The land urgently needs to be rescued by the reform.

Overcome negative trends

The average level of fertilizer application in Ukraine is 42 kilograms per hectare of arable land. That is 350% lower than the average level in countries which created a domestic land market. Isn’t this a reason to act faster?

Deterioration of land quality leads to a decrease in crop yields. The average annual increase in agricultural production since 2000 in Ukraine is 3.3%. Overall, this is 72% lower than the level of other post-socialist countries which have introduced the land market and already joined the EU.

Making matters worse, land use in Ukrainian agriculture follows the proven (and deleterious) Soviet model. Constant expansion of the plowed areas, disrupted crop rotations and slow introduction in efficient fertilizer use lowers crop yield increases. 

We see the results of poor agri land management in Ukraine with our own eyes. The welfare of villagers in Ukraine is traditionally below the national average and is currently in a deplorable state. The official unemployment rate in rural areas is 4.4% higher than in urban areas. However, this indicator does not take into account pendulum migration, forced migration abroad and includes a distorted concept of self-employment – when people because of the inability to get a decent job are forced to independently cultivate their land with a minimum level of productivity.

A little-known fact is that the decrease in Ukraine’s population is mainly due to the exodus from the country’s rural areas. Over the past 16 years, 2.9 million Ukrainians, or 18.1% (60% higher than the depopulationof urban areas), have left rural areas of the country. 

The only way to make a profit from the land for owners who do not want or cannot work it is to lease plots at rates which, while absolutely fair, are undervalued by 2-3 times relative to their potential. They cannot to provide their recipients with even the minimum cost of living.

Average agri land rental rates in Ukraine in 2015 are presented below.

There have been attempts by government to resolve or eliminate the regional disproportions illustrated above, such as legislation setting the minimum lease period of seven years, but they have been ineffective, because the moratorium on privately owned agricultural land sales has only worsened the disproportions and continues to apply.

Therefore, under the described conditions, the first and most important step in the development of the Ukrainian agricultural sector should be lifting of the moratorium on the sale of agricultural land and the subsequent launch of a land market in Ukraine. This will provide an opportunity for rural residents to make a decent income as well as mitigate Ukraine’s worsening demographic crisis. 

Legal situation

Visitors to regional centers where Ukraine’s best black earth is located may interested in who cultivates the surrounding fields and why. Answering this question, local officials will show you a pack of land lease agreements for 3, 5, 7 years with various companies.

Why are these, and not other companies, leasing the land? Why do the same agricultural enterprises again and again extend land lease agreements, although there are dozens, if not hundreds, of people willing to lease the land? 

Answers to these questions will amaze visitors, starting from the “at that moment no one else was found” story, moving on to more complex “and this company also promised to buy a TV for that kindergarten” and “build the road” plots. It’s impossible to get to the bottom of all these stories or determine if they are true. The situation is clear: If the right to extend the lease of several thousand hectares of black soil depends on a small group of officials, the word “corruption” will always be apply.  

How can this situation be changed? What we learn from the experience of reforms in different countries over the past 50 years is that it is necessary to change the institutional environment. This does not mean apprehending everyone who is suspected of doing something nefarious. If violations in some markets are massive, then “repressive measures will not be effective,” as Daniel Kaufman from the World Bank has said, 

People initially want to comply with the laws and behave honestly. If the environment pushes them to behave differently, the environment must first be changed. The next step is to pay attention to those market players who, under normal conditions, try to circumvent their competitiors without thinking too much about the methods.

Putting an end to non-transparent redistribution of land lease rights throughout the country is essential. Land should fall into the hands of those who buy long-term lease rights for land parcels or land plots at open tenders. Naturally, more efficient agri enterprises will be able to pay more. 

For more than a year, the Ukraine’s state geocadastre agency lobbied for adoption of the bill on the sale of lease rights only at auctions. In February 2016, the parliament adopted bill No. 2279, which significantly limited the possibility of obtaining non-auctioned land. Resistance to this innovation by participants in land leasing schemes was record-breaking. Passage of the legislation was delayed under many pretexts, as the bill’s timeline demonstrates. Overcoming overlapping corruption schemes for disposing of land is only the first step, but an important one. 

It is essential time to realize that de factor land privatization took place a long time ago. 

The groundlessness of the position of opponents of land sales is illustrated by the fact that most of Ukraine’s agricultural land has already found owners. This begs the question: What are we protesting against? Land reforms should have been introduced 20 years ago.

At the start of 2015, the total area of Ukraine’s agricultural land was 41.5 million hectares (or 70% of the territory of Ukraine).

The above graph shows that 75% of Ukraine’s agricultural land is already in private hands. Allowing people to fully dispose of what they own is the next step. This does not mean chanting at rallies that “We will not give an inch.” An inch has already been given. 

The sale of land lease rights must be accompanied by the sale of lands still belonging to the state. It is disingenous to cite sociological surveys which conclude: “The majority of people in Ukraine are against selling land.”

No, most Ukrainians do not mind, contradicting skewed sociological surveys, the results of which are incorrectly interpreted. Most Ukrainians want to live according to the laws of the most developed countries of the world. This is backed up by sociology and two Ukrainian revolutions.

Ukrainians who have made their European choice and lived through two revolutions are not against reforms. They are, however, opposed to selling land in the “crooked” way state-owned factories were once auctioned off. In order to benefit from past experience and years of hard work, the land sales market should be properly arranged to avoid repeating past mistakes. 

For starters, civil society in Ukraine is stronger than it was two decades ago and will not put up with egregious wrongdoing. Secondly, electronic management systems today are sufficiently developed to monitor what authorities do and how it is repported. Therefore, it is possible to hold tenders and identify those who will lease or purchase land transparently. 

There is one more important point. Today there are a large number of domestic companies and farmers who have learned to work in free markets for agricultural products. They have learned to make money on them. The old horror story that as soon as competitions on the basis of a higher price begin, foreigners will immediately descend on Ukraine and buy up cheap land has completely lost its relevance.

How much does Ukrainian land cost? 

The average regulatory monetary value of Ukrainian agricultural land at the end of 2014 was UAH 21,900, or $1,389 per hectare. Even the economic recession started after Russia’s invasion of Ukraine did not did not lower the price of a hectare below $1,100

One of the main stumbling blocks for the launch of the land market is the price of land. Many Ukrainian politicians tell the electorate that their land will be sold at “junk” prices, justifying this statement by comparing land prices in Ukraine and other countries. The graph below provides a similar comparison with the countries most frequently used as examples.

The price of Ukrainian land is indeed much lower than in France, Germany and even Romania (see graphic), but does this mean that Ukrainian land is undervalued? The cost of land is determined by the level of added value that is created on it. If we compare the level of value added per hectare of land with the price of this hectare, it is easy to see that the price of Ukrainian land is fully justified.

Classical economic modeling allows us to understand how the capitalization of the Ukrainian land market will grow in the foreseeable future. This allows us to make projections about how much investment will be made in the sector and how many jobs will be created.

It is also with great certainty possible to determine how quickly the land prices in Ukraine will increase and, accordingly, how strong a an impact the developing land market will have on other sectors of the country’s economy.

From the above figures and tables, it is easy to see that the highest rates of growth in the price of a hectare occur in the first two years of the market, which is explained by the presence of high pent-up demand. Thus, by the beginning of the launch of the second stage – the inclusion in the market of private lands after January 1, 2019, the latter, according to the forecast model, will increase in price by 71%.

It should also be noted that the very structure of the land fund in the country has to create a very rich, concentrated agricultural cluster. With a high density of sectoral processing and infrastructure enterprises. That is an additional competitive advantage of our country and will increase the value of land.

Checks and Balances

How to counter the risk of “speculative buying up of land” has long been described in the classic of economics and successfully implemented in tax legislation, for example, France and the United States, by introducing a special regulatory tax that will be paid by owners of land who do not process it. The size of this tax will be based on the purchase price of this land or its regulatory and monetary valuation. The estimated amount of such a tax will be from $ 100 to $ 200 per hectare, but if such amounts are too small, the upper limit may be revised.

Also developed a mechanism to protect sellers from the onslaught of buyers. According to article 12 of the law on land turnover, the state has a preferential right to redeem them. Thus, the owner of the land, if pressure is exerted on him, can always sell his property at a fair price to a special state agent.

In turn, this agent buys land and transfers the proceeds from their sale to a specially selected state bank, most likely, to Oschadbank. The latter was chosen due to the fact that a massive return of deposits after the peak of the banking crisis had passed created a problem of asset crisis for the bank: it is impossible to place assets with a reasonable degree of risk for the formed liabilities.

Consequently, the redemption and temporary stay in the ownership of Oschadbank agricultural land will allow the institution to earn on the increase in the price of land. Which in the first five years, according to experts, will average 20% per annum in currency.

The process of cooperation of one of the state banks and the special agent has not yet been worked out in detail, but their future equality in making commercial decisions is not in doubt. That will allow you to avoid corruption schemes that would be possible with the direct allocation of money from the budget.

Who will buy?

Today we can definitely say that most of the rights to lease land and land plots will be purchased by our domestic producers. Because they already have money for modern agricultural equipment and technological farms. So, there will be money for the main asset – land.

Please take a look at the brief presentation on the state of affairs. 6.7 million people for their land shares receive a fee close to 786 UAH per year. Well, it’s an unbearable shame for the country. They should receive many times more and will receive more as soon as the tenant is determined in a competition in which a large number of applicants can take part. After all, it is unacceptable that the money of simple rural workers today enriched agricultural holdings, close to the local authorities and oligarchs.

In addition, today the state has practically infringed upon the constitutional rights of 6.7 million people who own shares, prohibiting them from selling them. Therefore, the shadow sale of these plots is in full swing. Inheritance, IOUs, loans, pledges, donations – that only local notaries and large law firms from Kiev do not invent to take plots of milkmaids and tractor drivers with 40 years of experience at ridiculous prices. And they act brazenly and impudently – after all, people who are disappointed in the country’s legal system will not sue them.

Our duty today is to replace the disappointment of ordinary people with confidence. And confidence give quick and correct decisions. But not eternal whining – let’s wait, maybe the Georgians, the Americans or the Martians will come and do everything for us. And then it will be possible to sell both the land and the rights to rent it.

Reforms that generate confidence and billions of hryvnia additional income for ordinary people should come tomorrow. And we begin this process.

For example, the institutional basis for a qualitative improvement in the land market has already been created. First, there is an electronic cadastre of land. What simplifies the conduct of operations with plots dozens of times, and also makes it difficult to carry out illegal land frauds dozens of times.

Secondly, there are already tens of thousands of specialists in the country who are trained in advanced working methods. And it is their knowledge and experience that will ensure the implementation of reforms and the launch of an honestly functioning land market and lease rights. These are professionals who are well versed in the legal system of the state and are aware of reforms. And do not even doubt – they will form a new reality of the land market of the country. And not loyal to the local latifundista aunt from selrad.

And the third reason for people’s confidence that today you need to fight for your rights, you need to get, manage, arrange and work on your land, is that the whole country is more confident than ever before taking the path of reform. Therefore, no intrigues and horror stories from local princes who are trying to crank out the combinations in a clearly non-public interest should not scare anyone. People have the right and will be able to get their land, earn on it income for their family.

Billions of dollars for villagers

In social networks, on posters at rallies, people like to post pictures, where, on the one hand, a Swiss or German village is shown, and on the other, our battered one. Naturally, the comparison is complemented by a caustic signature criticizing reality.

So, the agrarian reform would have gone much faster if beautiful photos were also signed with absolutely truthful words – “the land is sold from time immemorial”. And the photos of the abandoned Ukrainian villages with the words – “almost 100 years, as the land was forbidden to sell.”

What will the villagers and agroinvestors get from the fact that the strange order in land relations in the country will be canceled?

Based on the above table, a simple rural family in the Czech Republic, which united the land shares received in a plot of 3 hectares in 1993, could receive on their security a little more than the equivalent of 2 thousand euros of credit resources in the then existing currency. Today, this family can get more than 13 thousand euros for its plot. To develop this business with this money, to buy new equipment, to master a new direction.

If we are talking about a plot of 10 hectares, it is already 44 thousand euros. And now tell me, please, who will win the competition for EU agricultural markets? A Czech farmer who received 44 thousand euros for development under his 10 hectares, or his Ukrainian counterpart who collected his 10 hectares from grandparents and relatives grandparents and is not at all sure whether he will not be able to redraw the field next year under the pretext of changing views on his documents?

That is why every year of delay with the abolition of the existing order in land relations we have a lag in the development of the agricultural market, it is worth further impoverishing and ruining the village and its inhabitants.

It must also be said that the yield of arable land is not an indicator that can be changed in a year or two. This is hard work for decades. And Ukraine can remain an advanced agrarian country only if for each field a program of preserving and increasing yields, scheduled for 10–20 years, is developed and implemented. After all, this is the approach to the development of fertility in developed countries. However, investment in quality of 10–20 years is possible only in private, but not in lease plots.

And this, if you wish, is the duty of all living generations to the future – to ensure such strong property rights to land that they not only own the fields, but also carefully improve them.

The Authors team: Maxim Martyuk , Mykhailo Kukhar,
Grigory Kukuruza , Sergey Dovgal , Anna Kovalchuk, Rostislav Shimanenko, Pavel Koval

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