A fair land market or a land grab?

Gary Reusche & Stephan Vitvitsky, Kyiv Post

The question of a land market in Ukraine has yet to make the transition from the Soviet past. Under the Soviet Union, private property was illegal.

After 15 years of independence, land reform in Ukraine is still unfulfilled. At stake is perhaps the best agricultural land in Europe, and its current owners are the poor and mostly neglected rural inhabitants.

The roots of the current situation are in the Soviet era and are directly related to the Holodomor, or Great Famine. During the reorganization of rural Ukraine by the Soviets, residents were uprooted, and during the famine their population was decimated. In their place were established collective farms.

These collective farms are now history, with the exception that the inheritors of the collective farms have ownership of the land, but not the right to sell it. Roughly 7 million rural Ukrainians have, or will soon have, land acts for approximately 25 million hectares of the best farmland
in Ukraine (and in Europe).

How to move from the current situation to the future is the crux of the problem. Will there be opportunities for the current residents to develop farms and small businesses and create a decent life, or will vested interests and elites grab the land? This drama will be played out in the
upcoming years.

What seems to be lacking is a vision for the future that gives realistic hope for the current landowners to consolidate and utilize this land in ways that are viable in a market economy.

In most transition economies, the creation of a land market and clear property rights is essential to successful market economy transformation. Ideally, land that is bought and sold within a market should change hands to those who seek to enhance productivity, efficiency, and growth.

As discussed by agricultural expert Andriy Yarmark in a recent interview in the Kyiv Post, a well-functioning land market also encourages investment and increases revenue through land sales, which helps create jobs and enhance rural livelihood.

The Ukrainian parliament's recent prolongation of the land moratorium shows again the government's reluctance to complete its market economy transition (though only the most naive will think that this situation is not benefiting someone).

Although Ukraine needs an open land market now, it must be implemented in a context of programs designed to assist the rural population to make the transition, and encourage small business development.

If a small number of rich individuals or banks accumulate large tracts of land by cheaply buying land from the rural poor, the outcome would be at best an industrialized agriculture or at worst asset-stripping and environmental degradation.

Such a land-owning oligarchy would reap millions of dollars and gain huge political influence, and rural residents would speed up their migration to cities.

If Ukraine is to create a land market, the government must make sure that it is done legally, transparently, and most importantly, for the good of the more than 15 million people living in rural areas.

Extreme poverty rates are highest in rural areas, with roughly one-third living under a dollar a day. Simply creating a land market without certain conditions in place will not necessarily improve the lives of Ukraine's poorest residents.

First, the government initially should regulate land transactions in order to ensure a fair and socially equitable distribution of land. Quotas may be placed that limit how much land an individual may purchase, which would prevent oligarchs from purchasing large tracts of land at low prices.

Incentives should be given to the middle class and even to poor rural dwellers, such as tax breaks or subsidies, to encourage them to purchase land or cultivate the land they already own. Opponents of this policy would scream that government regulation would counter market reforms and lead to poor results.

Nevertheless, at least in initial years, the government must play a role in regulating the land market to ensure that land is distributed fairly. Only when a land market has demonstrated functionality and stability should the government step away.

Secondly, and of equal importance, is that credit must be available to new landowners. For what is a new landowner, especially if he is a former household plot farmer, going to do with 20-30 hectares if he has no access to credit?

Without it, many would be forced to sell - probably to a wealthy individual who can invest his own money, thereby increasing the likelihood that a land oligarchy develop.

Rural areas are currently vastly underserved by Ukraine's credit market. Although many major banks, such as PrivatBank, Raiffeisen Bank Aval, and ProCredit Bank, now offer small and micro-loan products, they primarily focus on urban areas. Agricultural loan products also are limited in their scope.

According to statistics from the Ukraine Micro-Lending Program, an EBRD-sponsored program that helps banks create micro-loan products, as of mid-2006 only roughly 4,000 agricultural loans have been disbursed worth $20 million.

Various donor aid agencies, including the EU, USAID, and the World Bank, have also tried to build up the credit cooperative system, known in Ukraine as credit unions and cooperative banks.

The government has approved a strategy for the development of a credit cooperation system, but in order to effectively implement the system, changes to the legislation are required.

These are not encouraging signs for potential landowners. Therefore, banks, NGOs, and credit unions should be encouraged to extend credit in small towns and rural areas, helping fill a major void in Ukraine's credit market.

Lastly, there must be strong institutions and courts in place in order for land transactions to be processed efficiently, ensuring that laws are upheld, and disputes settled. A land market without institutions would lead to chaos.

Transactions would be made very slowly, disputes would be settled through bribes and threats, and individuals would easily disobey the law. This state would be devastating for rural areas and would further encourage corruption, already a major problem in Ukraine.

Unfortunately, there is no quick and easy solution that can solve the current land dilemma. It is high time that the government, along with NGOs and development agencies, took steps to ensure that institutions and courts are functional and transparent; as well as ready to handle the huge workload once a land market is established.