Ukraine can boost an­nual out­put by $15 bil­lion with land re­form

Kyiv Post - - Business Focus -

Land re­form — lift­ing the mora­to­rium on agri­cul­ture land sales — is the most pow­er­ful mea­sure the govern­ment can take to boost eco­nomic growth and job cre­ation, par­tic­u­larly in ru­ral ar­eas.

More than 70 per­cent — some 43 mil­lion hectares — of Ukrainian ter­ri­tory is classified as agri­cul­tural land. And that land is ex­cep­tion­ally fer­tile: Ukraine has one-third of the world’s black soil. But de­spite this abun­dance, agri­cul­tural yields in the coun­try are only a frac­tion of those in other Euro­pean coun­tries whose land is not of the same qual­ity. This is be­cause land users have lit­tle in­cen­tive to in­vest in land man­age­ment, as nei­ther land own­ers nor users know if, when or how the mora­to­rium will be lifted. More­over, get­ting credit is dif­fi­cult and costly as land can­not be used as col­lat­eral.

Mean­ing­ful re­form must in­clude pro­vid­ing in­cen­tives for long-term in­vest­ment and proper land man­age­ment, ac­cess to credit and trans­fer of land to its most pro­duc­tive uses. The re­sult­ing boost to agri­cul­tural pro­duc­tiv­ity could add $15 bil­lion to an­nual out­put and in­crease an­nual gross do­mes­tic prod­uct by about 1.5 per­cent­age points. And it would boost pub­lic rev­enue — up to $2 bil­lion from the one-time sale of state land and $250 mil­lion an­nu­ally from land leases — free­ing pre­cious bud­get space for schools, hos­pi­tals and in­fra­struc­ture.

It would also al­low land own­ers to get a fair re­turn on their most valu­able as­set.

Today, ren­tal prices for agri­cul­tural land in Ukraine are a frac­tion of their mar­ket value. In­deed, some 4.5 mil­lion small land own­ers, of­ten retirees, cur­rently re­ceive 10–20 per­cent of an­nual in­come from rent­ing out their land at rates about a tenth of the level in Euro­pean Union coun­tries, and well be­low de­vel­op­ing coun­tries like Ar­gentina and Brazil. This is un­fair to landown­ers and is stran­gling the liveli­hoods and fu­ture prospects of the coun­try’s ru­ral pop­u­la­tion.

The eco­nomic case for lift­ing the mora­to­rium is clear. But un­less this is done trans­par­ently, the risks may out­weigh the ben­e­fits. In a coun­try that has seen enor­mous pub­lic wealth dis­ap­pear through cor­rup­tion and theft, and with pub­lic in­sti­tu­tions charged with the pre­ven­tion of this kind of malfea­sance yet to demon­strate their ef­fec­tive­ness, many fear that any change will lead to con­cen­tra­tion of land in the hands of the elite. Thus, fair and trans­par­ent re­form of Ukraine’s land mar­ket would demon­strate to Ukraini­ans — and the world — that the coun­try can en­sure that its unique nat­u­ral re­sources can ben­e­fit all of its ci­ti­zens.

The good news is that such an out­come is pos­si­ble if the govern­ment fol­lows through on ac­tions it is tak­ing on sev­eral fronts.

First, mak­ing land mar­kets trans­par­ent: Build­ing pub­lic trust in agri­cul­tural land mar­kets will re­quire in­for­ma­tion from reg­istry and cadas­tre to be in­te­grated and ac­cu­rate. Prices — at least at the ag­gre­gate level — for land ren­tal and sales should be pub­lic. Trans­ac­tions need to be trans­par­ent. Mea­sures, such as the use of e-ser­vices in the cadas­tre nd manda­tory e-auc­tions for ren­tal of state land, should be ex­tended to sales.

Sec­ond, in­form­ing land own­ers of their rights: To use their land most ef­fec­tively, land own­ers need to be aware of their rights. One way to achieve this would be to up­grade the tech­ni­cal and op­er­a­tional ca­pac­ity of the par­lia­men­tary om­buds­man for hu­man rights with the es­tab­lish­ment of a land om­buds­man. That would help pro­vide land own­ers un­bi­ased le­gal ad­vice on ques­tions re­gard­ing their land rights, and help ac­cess the ju­di­cial sys­tem and get re­dress if th­ese rights are vi­o­lated.

Third, in­creas­ing ac­cess to fi­nance for farm­ers: Nearly two decades ago the Peru­vian econ­o­mist Her­nando de Soto pub­lished "The Mys­tery of Cap­i­tal," in which he iden­ti­fied the link be­tween prop­erty rights and eco­nomic devel­op­ment. His sim­ple but ground­break­ing ob­ser­va­tion was that world­wide, tril­lions of dol­lars of “dead cap­i­tal” were frozen be­cause poor peo­ple did not en­joy full own­er­ship of their land, in­clud­ing the abil­ity to lever­age its value to bor­row cap­i­tal. In Ukraine, the mora­to­rium on land sales has pre­vented land own­ers from us­ing their most valu­able as­set as col­lat­eral, mak­ing it im­pos­si­ble to ac­cess credit to ex­pand pro­duc­tion or start a new busi­ness. With a strong reg­u­la­tory en­vi­ron­ment, trans­par­ent land sales mar­kets would help much-needed ru­ral in­vest­ment and en­able banks to ex­tend credit to fam­ily farm­ers and ru­ral smaller busi­nesses. Work on in­stru­ments to fast-track devel­op­ment of ru­ral fi­nan­cial mar­kets is al­ready pro­gress­ing, in­clud­ing work­ing with farm­ers’ as­so­ci­a­tions to train farm­ers with no his­tory of credit or record­keep­ing on how to put to­gether vi­able busi­ness pro­pos­als.

Land re­form will be chal­leng­ing, but the re­wards prom­ise to be trans­for­ma­tive. More­over, given Ukraine’s po­ten­tial as a com­modi­ties ex­porter, re­form would im­prove food se­cu­rity glob­ally. For­tu­nately, the govern­ment has taken im­por­tant first steps in the right di­rec­tion. It has made land re­form a pri­or­ity and be­gun crit­i­cal prepara­tory mea­sures. So, for the sake of the Ukrainian peo­ple and the coun­try's eco­nomic prospects, I hope the au­thor­i­ties and politi­cians have the vi­sion and courage to lift the mora­to­rium this year, so that Ukraine’s po­ten­tial will fi­nally be tapped.

Satu Kahko­nen is the World Bank coun­try direc­tor for Be­larus, Moldova and Ukraine. This ar­ti­cle was first pub­lished in Ukrain­ska Pravda and is re­pub­lished with the au­thor's per­mis­sion.

A trac­tor driver works a Kyiv Oblast field on Oct. 23. (Oleg Pe­tra­siuk)


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