The former socialist countries of Eastern Europe (that is, Europe east of Germany and west of the Urals, but including all of Russia) began a transition to a market economy in the late 1980’s and early 1990’s. This paper looks at one aspect of that transition: the transition from state ownership to private ownership of agricultural land and the accompanying transition to a land market for agricultural land.
The countries included in this study have been divided into four groups:
The Western CIS countries, with the exception of Moldova, are still struggling over meaningful private ownership of agricultural land and the right to sell land, to mortgage land, and to employ land to its best use without interference from the State. All of the Western CIS countries are still primarily farming through large collective-style farms with little benefit afforded to individual landowners. Few land transactions are taking place, and the majority of those land transactions that do occur involve leasing back to the collective farms from which the land was allocated or divided. The Western CIS countries, with the exception of Moldova, have lacked the political will to move forward on land reform efforts.
The Transcaucasus countries are leading the CIS in terms of privatization and farm reorganization and are ahead of some of the EU accession states in these areas as well. Each of these countries has the political will to privatize land and move toward a market economy. The Transcaucasus countries plus Moldova devolved some land management responsibility to the local level. In addition, they passed legislation clearly allowing for land transactions.
In the Balkan countries, the rural land markets are not only influenced by economic transition issues, but also by ethnic strife, political instability, and war. The Balkan countries have diverted a great deal of their energy and resources that might have otherwise been directed (at least in part) toward land market development goals to land issues related to the instability and strife.
The EU accession countries have struggled less with the ideology of a market economy than many of the CIS countries, so privatization of land was not disputed. However, in some cases, EU accession countries have chosen to continue support for large collective-style farms, and much less farm break-up has occurred than in Armenia, Azerbaijan, and Georgia. While there are many contributing factors, it does appear that in countries where there is a lack of independent private farmers, the land market is functioning at a lower level than in countries with a larger number of private farms.
The paper discusses the following issues related to land reform and land market efforts in the Eastern European countries.
In the Western CIS countries, except Moldova, much of the agricultural land has been privatized under a “land share” system, in which a large majority of private owners (former members of the state and collective farm system) still hold their rights in common, with some form of right to partition land in kind (as yet unexercised). In those countries, the right to a land share has little value because there is little chance to exercise meaningful control over that land share.
In the Transcaucasus, land was distributed and farms restructured at the same time. Private farmers have title to their land.
Balkan privatization is advanced, with large state-owned farms and agricultural processing entities representing a small percentage of agricultural land. Future tasks include privatizing the small amount of remaining land, extending the favorable credit and subsidy benefits reserved for state farms to private farmers, and planning for the failure (and break-up) of those large farms and entities that are preserved as private stock companies.
In the EU accession countries, the privatization issues are related to the restitution process primarily. Potential claims of former owners, conflicting laws regarding the restitution process, and unclaimed land have all slowed down the privatization process.
During the privatization process, some countries have been slow to privatize state land, and instead lease out that land. Many countries have formally established "land funds," the purposes of which range from consolidation of small plots to assisting family farm development to simply renting land to large former collective or state farms. An ongoing concern with leasing of state-owned land is that it is often leased at very low rent levels, thus undercutting the development of private market rents. In either case, as long as large quantities of agricultural land are available for lease at no cost, or practically no cost, agricultural land will continue to have very little, if any, market value.
Lack of farm reorganization is an impediment to market development in the four Western CIS countries and many of the EU accession countries that restituted agricultural land to its former owners. Farm size in a market economy is an economic variable that reflects market signals. Providing a legal and policy framework in which individual farmers can adjust farm size to respond to market signals is crucial. The policy and legal framework should not only allow, but also encourage farm reorganization into units of whatever size is chosen by farmers.
In the western CIS countries and many of the EU accession countries, land privatization and farm reorganization did not occur together, and even when land was actually demarcated and titled, little farm reorganization occurred. In the western CIS, farmers did not withdraw their land from the collectives, and in the EU accession states many of the new owners were not farmers or even rural residents, and therefore leased their land back to the collective. As mentioned above, the Balkan farms are primarily privatized and farmed individually. Few privatized plots or land shares are farmed as large operations.
Purchase and sale transactions in agricultural land will not occur in the Western CIS countries unless legislation clearly allows such transactions, permission of local bureaucrats is not needed, and procedures for notarization and registration are simple and affordable.
In the rest of the Eastern European countries, the legal framework for land transactions is adequate and the impediments to transactions relate to administrative process and market imperfections. This situation generally holds true for the surveyed Balkan countries. The most common legal restriction is the prohibition on foreign ownership of agricultural land that occurs not just in the Eastern European countries, but in many countries throughout the world.
Mortgage of agricultural land cannot occur without secure land rights and a land market. In addition to the need for legislation that allows mortgage of agricultural land, there needs to be legislation allowing for the free transfer of land. Land-based lending will not occur until there is an active agricultural land market and for Russia, Ukraine, and Belarus major changes in legislation and political will would have to occur first.
Once mortgage of agricultural land is a legal right, as it is in the rest of the Eastern European countries, it still needs to be a part of a larger scheme of providing credit to farmers. Few landowners are using land as security for loans in the Eastern European countries. In fact, mortgage lending to any great extent will not occur until: (1) an active land market exists and agricultural land has market value; and (2) foreclosure procedures are reasonably quick and effective.
One of the key measures needed for a fully functioning land market is a system for registering legal rights, so that right holders can be easily identified and have their rights protected.
The Western CIS countries have seriously under-functioning registration systems and need basic legislative assistance to begin with. Effective land registration is (with the notable exception of Albania) largely not occurring in the surveyed Balkan countries, although the vast majority of agricultural land is privately owned and privately farmed. The Transcaucasus and the EU accession countries are in the process of transforming and bettering their registration systems, but still have problems due to the large number of new owners and the need to reestablish boundaries.
Land fragmentation is an issue that has been raised in all of the Eastern European countries with the exception of Belarus, Russia, and Ukraine. In the surveyed Balkan countries, fragmentation is seen by some to be a problem in Macedonia, Albania, and Croatia. Post-conflict issues have rendered this a peripheral issue in the other Balkan countries. The EU accession countries are receiving much help from the European Union in relation to consolidation efforts. Many of these programs are a combination of market assisted reform and government intervention at the community level. Because many of the EU countries have a State land fund, there is already a system in place for purchasing and redistributing land.
There are a variety of measures that could be undertaken to help create and strengthen the private sector institutions that participate in and support healthy land markets. More thought should be given as to how to quantitatively ascertain the progress of such programs.