Large and Small Agricultural Business in Russia: Market Adaptability and Efficiency V.Y. Uzun, VIAPI 1. Basic Concepts In Russia, the major part of agricultural output is created in large and largest agricultural organizations, on the one hand, and small and smallest family farms, on the other hand. In this article, the development and adaptation of agricultural organizations of these two types to market conditions is considered.
In this article, the term “small agricultural business” describes both individual and family farms and small agricultural enterprises (according to the Russian legislation, the enterprises with the total number of permanent workers not exceeding 60 persons). All the other agricultural enterprises are named “large agricultural business”.
In market economy countries, agricultural output is created mainly in small business. The issue of small business development is broadly discussed in economic studies. Economic theories explain the sustainability and efficiency of family farms by proprietor’s labor motivation that is stronger than one of hired worker, the proprietor’s orientation not to profit but to the needs of his family, higher aesthetic and moral value of labor in the owned farm, the integration of labor process and family life, and stronger environmental sustainability of family farms.
The development of large business is supported by economy of scale. However, it is constrained by the higher transportation costs, managerial complexity, and environmental threats. The modern institutional economic theory adds one more argument — hired workers’ behavioral opportunism. O. Williamson defines the opportunism as “the standing for one’s interests even by the use of the obvious forms of deceit such as lie and fraud, but not only them. More often, opportunism means finer passive or active forms of deceit being reflected ex ante and ex post.”1 To cope with opportunism, the appropriate items can be inscribed into labor contarcts, and monitoring can be strengthened. However, it is impossible to control everything, so the negative consequences of opportunistic behavior are unavoidable. This problem is the particular issue of agricultural organizations (AgO) because of their dispersed allocation across the territory causing the complexity of the control over contractors and the protection of agricultural machinery, equipment, and cattle form theft. This problem is of the particular importance for Russia, where the population has rich experience of opportunistic behavior gained during the years of socialism.
In contrast to industrial sector (for example, conveyer industries), in agricultural sector it is possible to define the precise scope of workers’ responsibility, and labor content and efficiency.
The “specter” of works depends on plants species and animal breeds, soils, relief, etc., so it is practically impossible to struggle against behavioral opportunism using the standards and control measures. Therefore, a family farm the proprietor of which at the same time plays the role of manager, worker, security guard, controller and so on, is more appropriate. The number of permanent hired workers is small, and they work together with and under the control of the members of the proprietor’s family.
In the period of socialist economy, the dominating role of large business was caused by the following factors:
— the “enslaving” of peasants;
Williamson O. Povedencheskie Predposylki Sovremennogo Economicheskogo Analysa. //TESIS T.1. Part 3,1993, с. 43.
— the distribution of land resources (in sovkhozes — of some other resources) accomplished by the State;
— the use of the State repressive bodies for the struggle against workers’ behavioral opportunism;
— the simple system of economic control in the context of direct planning of agricultural production and resource supplies, the prices determined by the State, the attaching of suppliers to customers, etc.;
— soft budgetary restrictions; if AgOs suffered from the deficiency of cash resources, the State usually compensated the deficiency, and wrote-off their debts; the bankruptcies were out of practice;
— the restrictions for small business; large enterprises survived because they had no competitors on domestic market; the State used various measures to restrain small business;
— the absence of external competitors.
Within the transition to market economy, the above mentioned factors lost their importance or their impact was significantly weakened. It is impossible to force peasants to work in AgO; AgOs should buy or lease land and other assets; the State can hardly be helpful in the struggle against the workers’ opportunistic behavior. The choice of agricultural product line, customers, and prices for products and resources is the issue of AgOs’ managers. The insolvent enterprise becomes a bankrupt. AgOs survive under the permanent competitors pressure, both internal (small agricultural business) and external. Can the role of AgOs be maintained under such conditions 2. The Trends in the Development of Agricultural Organizations The most important trends in the development of AgOs that had been revealed in the course of the study, include the following.
— The impetuous changes of the organizational and legal forms of enterprises still continue. The reforms have started 14 years ago, but the forms of enterprises had not stabilized yet. In the initial stage of reforms, limited partnerships and closed joint stock companies had been predominantly created, but by the mid-1990-s, most of them have been re-registered as agricultural production cooperatives (although it was less efficient form of enterprise). During the recent two years, the backward trend was observed, i.e., the re-organization of agricultural production cooperatives into limited societies and closed joint stock companies.
— AgOs have lost the most of their assets, which they possessed in the initial stage of reforms.
From 1996 to 2002, fixed capital stock (in constant prices) has decreased 700% and net assets 800%.
— In AgOs, the fast concentration of capital takes place. By the moment of privatization, 100% of authorized capital stock and votes were in the hands of peasants; by the beginning of 2003, they possessed at most 25% of votes.
— The differentiation of AgOs by their financial performance grows. A part of enterprises (nearly 40%) becomes richer, and the rest ones suffer from growing debt. The volume of debt is so large that they can hardly pay it off on their own.
— In AgOs sector, the concentration of production and resources takes place. The share of the largest producers grows, and the role of others becomes less important.
— In the Russian agriculture, the super-large organizations are forming, i.e., agrofirms and agroholdings. Each of them possesses dozens and even hundreds thousand hectares of land, and dozens of thousand hired workers.
— The major part of AgOs has transformed into small enterprises;
— The fast process of the liquidation of AgOs (mainly small and insolvent ones) takes place.
— The resources of liquidated enterprises are passed to the hands of new users and owners, predominantly again to AgOs and agrofirms, but not to farmers and individual subsidiary plots of population.
3. Small Business in Agriculture Small agricultural enterprises. By the beginning of 2003, in Russia there were 29.8 thousand small and other enterprises engaged in agricultural production. In 2002, small enterprises and other agricultural producers possessed 7.8 million ha of agricultural land. The total volume of agricultural output achieved 23.3 billion rubles. Small agricultural enterprises and other agricultural producers specialize mainly in crop production (in 1999, their share in total crop output constituted 76%). In 2002, they produced 6 million tons of cereals and 0.8 million tons of oilseed. The number of cattle and the volume of livestock output in small enterprises are insignificant and tend to decrease.
Peasant (farm) holdings. Despite the expectations, in Russia farm sector had not become the dominant agricultural sector. In 2002, its share in the total agricultural output constituted only 3.7%. However, peasant (farm) holdings are the most rapidly developing sector of the Russian agriculture. During the recent five years, the area of land possessed by farmers annually increased by one million ha. The increase was caused mainly by the lease of land owned by land share holders. Farmers win the competition with AgOs for the additional land because they are able to pay higher rent to land share holders.
In farm sector, the highest growth rates of agricultural output are observed. From 1998 to 2000, agricultural output increased 225% (in AgOs sector, it increased 25%, i.e., growth rates were times lower than ones of farm sector).
Although in general the share of peasant (farm) holdings in gross agricultural output is not high, farm sector significantly contributes to the production of some agricultural products. In 2002, farmers produced 19.9% of oilseed, 12.2% of cereals, 7.2% of sugar beet, and 7.8% of wool.
In some regions of Russia (the Republic of Ingushetiya, Evreyskaya autonomous region) farmers produce more agricultural products than AgOs. In Saratov region, the districts of “total farmerization” have appeared, where all the AgOs had been liquidated, and their land and assets had been passed to the hands of farmers. In Saratov region, sown area in farm holdings exceeds one million ha, and total cereals output exceeds 1.3 million tons. Farmers produced 35% of cereals and 37.2% of oilseed in the region.
The plots of population. During the years under the study, the area of land used by the plots of population has increased 2 times. However, the RF Goskomstat data on the use of land by the plots of population are obviously not comprehensive.
First, these data do not include lands of several categories which are used by population, i.e., lands allotted to population for hay-making (15,253 thousand ha of agricultural land), individual and collective livestock production (532 thousand ha), individual home building (395 thousand ha), individual agricultural business (201 thousand ha), and land plots and land shares allotted without the permitted type of land use (2973 thousand ha). According to the data of Roszemcadastre, by January 1, 2003, the citizens of Russia (farmers excluded) legally possessed 27.8 million ha of agricultural land (14% of the total area of agricultural land allotted to agricultural producers).
Second, in addition to legally allotted land, people owning cattle use a part of common-used land of rural administration for pasturing and hay-making. By the beginning of 2002, the area of this land amounted 7.8 million ha2.
Thus, the total area of land used by population constituted not 8.6 million ha (the Goscomstat of the RF data) but 27.8 million ha of legally allotted agricultural land plus 7.8 million ha of unofficially used land (land in the disposal of rural administration), i.e., 35.6 million ha.
In the Russian statistics, the data on the number of workers in the plots of population are not available. In 2002, the number of workers engaged in agricultural commodity production in the plots of population can be roughly estimated as 3.3 million people (the total number of employees in 2002 (7,683 thousand people) minus the number of workers in large and medium AgOs, small AgOs and peasant (farm) holdings (3,800, 186.6 and 417 thousand people, correspondingly)).
The number of workers engaged in commodity production in the plots of population is nearly equal to the number of employees in large and medium AgOs. However, the major part of workers in the plots of population is engaged in non-commodity production which statistics relates to family holdings. The studies accomplished by the Goscomstat of the RF, the average annual number of workers in family holdings amounts nearly 10 million people3.
Therefore, the total number of workers in the plots of population amounts 13.3 million people.
This number is threefold higher then the total number of workers in the other types of enterprises.
The role of individual subsidiary plots in the life of rural population is reflected by the following figures. Acceding to the budgetary studies accomplished by the Goskomstat of the RF, in 2002, the per capita monthly revenue of individual subsidiary plots of rural population constituted 4,192 rubles4. In 2002, the workers’ compensation paid by agricultural enterprises (cash and products, payments to non-budgetary funds and income tax excluded) amounted 43 billion rubles5, or 900 rubles per capita of rural population. Hence, the revenue of agricultural population gained from individual subsidiary plots were 4.7 times higher than one in large enterprises.
4. Agrarian Reform and the Changing Role of Large and Small Business During the years under the study, the role of agricultural enterprises on labor market has dramatically decreased. From 1990 to 2002, the average annual number of workers in large and medium AgOs fell from с 8.3 to 3.8 million people, while the number of employees in small business engaged in commodity agricultural production has increased from 14 to 3.9 million people. In addition, nearly 10 million people were engaged in small non-commodity agricultural enterprises6, i.e., the real number of employees engaged in small business was 3.6 times higher than the number of employees engaged in large business.
According to the official statistics, from 1990 to 2002, the area of land allotted to agricultural enterprises, decreased from 209.8 to 150.4 million ha, i.e., nearly by 30%, and the area of land allotted to family sector increased nearly by 20 times and by the beginning of 2003 constituted more than 44 million ha. This land area does not include the lands of rural administration (nearly 8 million ha of agricultural land), and the lands of AgOs that are unofficially used by population.
AgOs did not succeed in the competition with family holdings. During the reform period, the Land Fund, RF, January, 1 2002 М., Roszencadastr, 2002, p. 7234, 766.
Ecomomic Activity of Russian Population. М., Goskomstat RF, 2002, p. 106.
Selskohozyaistvennaya Deyatelnost Hozaystv Naseleniya v Rossii: Goskomstat RF. - М., 2003, p. 151.
Summary Annual Report of Agricultural Enterprises, Russia, 2001.
Russian Regions. Social-Economic Indices. М., Goskomstat RF, 2002.
agricultural output of family holdings has increased by 30%, while the AgOs’ output has dropped 2.3 times.
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