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Russia/Ukraine: U.S. Analysts Predict Little Improvement In Farms

Washington, 30 June 1998 (RFE/RL) -- U.S. Agriculture department analysts say the absence of land reforms in Russia and Ukraine will keep farms in both countries less efficient and less productive into the next century.

In a report issued recently by the department's Economic Research Service, analysts William Liefert and David Sedik say that means Russia will have to continue importing grain beyond 2005 while Ukraine will barely be able to become a grain exporter by then.

The livestock industry in Russia should become somewhat more productive in the coming years, say the analysts, but the country's comparative disadvantage in meat production will continue due to high costs of production and processing. Russia will continue to have to import meat, at least half of it poultry, they say.

The U.S. agricultural analysts say the modest growth in agricultural productivity they forecast will be due mainly to farms using inputs -- fertilizers, machines, etc. -- more efficiently, an action that will be forced by their worsening financial condition.

However, the analysts continue, farms in the two countries are not expected to make any substantial changes in the way production is organized and managed. "Major productivity growth requires institutional reform," say the analysts, reform that would fundamentally improve producers incentives to use everything more productively.

Their report says the absence of land markets in particular -- the ability to freely buy and sell land -- has hurt agriculture in both countries in three ways.

First, they say, without markets, land becomes a nearly free good for managers. It doesn't cost them anything, so they tend to overuse it as cultivation is pushed into low-yielding marginal land.

Secondly, the analysts say, without the ability to buy and sell land, the farm's primary asset -- it's land -- cannot function as collateral for loans to fund capital investment.

Thirdly, they say, without markets, land becomes virtually free for farms, but also "inalienable" -- meaning it can't be lost through the farmers' taking unnecessary risks. Because farmers don't risk losing their land, regardless of how unprofitable they might be, say the analysts, managers can pursue objectives other than productivity-raising cost minimization.

That means, they say, that farm managers can put keeping workers' jobs ahead of trying to make the farm profitable or efficient.

Lastly, they argue, the area devoted to crop growing remains much higher than if well-functioning land markets were created.

The analysts say they assume a rise in real growth in the general economies of both countries -- as measured by the GDP, or gross domestic product -- and that this will increase consumer demand and therefore the consumption of meat.

The anticipated productivity growth in Russian livestock operations will allow Russian domestic producers to satisfy most of this increasing demand by the year 2005, say the U.S. analysts. However, they add, some of the increased demand will have to be met by rising imports of meat. "This indicates that Russian productivity growth will be insufficient to make the country competitive in meat production vis-a-vis the world market," they say.

The analysts forecast Russia's grain imports to total about 2.5 million tons by 2005 while Ukraine is expected to export this same amount by then.

They say that domestic producers in both countries can increase their output only through competitiveness-enhancing productivity growth, but the "poor outlook" for institutional reform "weakens the prospects for high productivity growth."