The evolution of agrarian institutions: a comparative study of post-socialist Hungary and Bulgaria 9780472112098

Table of contents :
Frontmatter
Preface (page vii)
Acknowledgments (page ix)
Chapter 1. Introduction (page 1)
Chapter 2. An Analytical Framework (page 7)
Chapter 3. Decollectivization in Bulgaria (page 28)
Chapter 4. Decollectivization in Hungary (page 59)
Chapter 5. Comparing the Cases (page 91)
Chapter 6. Conclusions (page 107)
Appendix A (page 117)
Appendix B (page 118)
Notes (page 119)
References (page 123)
Index (page 131)

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The Evolution of Agrarian Institutions

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The Evolution of Agrarian Institutions A Comparative Study of Post-Socialist Hungary and Bulgaria

Mieke Meurs

Ann Arbor

THE UNIVERSITY OF MICHIGAN PRESS

Copyright © by the University of Michigan 2001 All rights reserved Published in the United States of America by The University of Michigan Press Manufactured in the United States of America

€9 Printed on acid-free paper

2004 2003 2002 2001 4 3 2 1 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, or otherwise, without the written permission of the publisher. A CIP catalog record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication Data Meurs, Mieke. The evolution of agrarian institutions : a comparative study of post-socialist Hungary and Bulgaria / Mieke Meurs.

p. cm. Includes bibliographical references. ISBN 0-472-11209-0 (cloth : alk. paper) 1. Agriculture, Cooperative—Hungary. 2. Agriculture, Cooperative—Bulgaria. 3. Post-communism—Economic

aspects—Hungary. 4. Post-communism—Economic aspects—Bulgaria. 5. Hungary—Rural conditions. 6.

Bulgaria—Rural conditions. I. Title. HD1491.H9 M47 2001

338.1'09439—dc21 2001000384

a

Contents

Preface vil Acknowledgments 1x

Chapter 1. Introduction ] Chapter 2. An Analytical Framework 7 Chapter 3. Decollectivization in Bulgaria 28

Chapter 4. Decollectivization in Hungary 59

Chapter 5. Comparing the Cases 91

Chapter 6. Conclusions 107

Appendix A 117 Appendix B 118

Notes 119 References 123

Index 131

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Preface In part, this book is a response to the triumphalist “transition” literature of the early 1990s, which predicted a quick and universal transition of formerly centrally planned economies to free market economies. This early transition literature was in many ways reminiscent of the less sophisticated writings on socialist development—it heralded the final triumph of an inevitable natural order and offered one idealized economic system as the universally optimal method for organizing economic and social life. Looking at the changes in agriculture in East Central Europe over the last decade, it is clear that transforming centrally planned systems into market economies is much harder and more problematic than the early advocates realized. Scholars have consistently reported slow change in rural institutions and great variation in the speed and direction of changes across countries and regions. Explanations for this unexpected outcome often simply attribute it to maneuvering by an anticapitalist rural old guard or backward state officials— groups seeking to block the natural forces of history. Yet recent developments in economics and other social sciences offer a precise set of analytical tools for

examining such questions of why and how institutions change (or fail to change) and what motivates individuals to bring about such change. In this book I bring some of this new literature, the framework of new institutionalist economics, to bear on the question of agrarian change in East Central Europe. In doing so, I seek to provide a more analytical framework for understanding variations in outcomes. Using this framework, I suggest that there are economic reasons why, in some places, a majority of rural households may not find it in their interest to adopt private farming, at least not in the short term. We should expect agrarian institutions to change very differently across different country and regional contexts and should not expect to find universally best practices. It follows that the transformation will not necessarily result in the triumph of market-oriented agriculture based on private farming.

Similar challenges to the triumphalists have emerged since the mid1990s. A body of critical literature has begun to develop that includes works authored by David Stark and Lazlo Bruszt and collections edited by Michael Burawoy and Katherine Verdery as well as John Pickles and Adrian Smith. The authors involved in this project come from a variety of disciplinary backgrounds, and their analytical frameworks differ significantly from one another and from the one developed in this volume. But we are all working to develop robust analytical frameworks for understanding outcomes in formerly cen-

vill Preface trally planned economies—frameworks that incorporate, rather than ignore, the vast historical and institutional differences among regions. The emerging body of literature, and the analysis in this volume, suggests that policymakers in transforming economies will need to tailor policies closely to the specific conditions under which reforms are to be implemented. Accepting that a certain “best practice” institution will not take root in a given region, and that locally emerging alternatives may provide superior solutions in local conditions, should not imply that government officials are unable to influence, and improve, the path of reform. Once the origins of specific institutions are understood, it may be possible to use policy to improve their functioning. Appropriate policy is a matter of considerable urgency. For the period 1996-98, agricultural productivity remained at only 69 percent of its 1979-81

level in Bulgaria and 71 percent of its previous level in Hungary (www .worldbank.org). By 1997, agricultural wages had fallen from 98 percent of national levels in 1991 to 75 percent of national levels in Bulgaria and 72 percent of national levels in Hungary (BNIS 1998, 88; HNIS 1998, 90), over a period when national wages were also dropping radically. Of course, much of this decline is driven by factors exogenous to agriculture, such as falling domestic food demand (which has accompanied falling wages), trade disruptions, and the high interest rates that have been used to control inflation. But organizational problems within agriculture also contribute importantly to slow agricultural growth. Policies to address the problems could contribute to both improved agricultural productivity and rural income distributions, even in the face of the broader weak economic context.

Acknowledgments This book is the product of long-term research projects that began in Bulgaria in 1989 and in Hungary in 1992. Over the past decade, these projects have benefitted from the support of many organizations and individuals. Without this support, my work would not have been possible. Funding from the John D. and Catherine T. MacArthur Foundation, the National Council for Soviet and East European Research, and the National Science Foundation (NSF SBR9515244) supported the data collection and my travel. The Institute of Sociology of the Bulgarian Academy of Sciences and the Institute of Political Science of the Hungarian Academy of Sciences provided support in ways too numerous to mention. My colleagues Stanka Do-

breva and Veska Kouzhouharova at the Bulgarian Institute of Sociology worked with me on every stage of data collection for this book and related projects, stretching my research dollars through hard work and pure resolve. Imre Kovach and Istvan Harcsa of the Hungarian Institute of Political Science and National Institute of Statistics, respectively, organized the Hungarian data collection and generously shared with me their data and insights from other projects. Andras Csite, also of the Hungarian Institute of Political Science, provided invaluable research assistance on a number of occasions. Here at American University, several graduate students contributed to this project. Darren Spreeuw worked on the initial stages of the project and coauthored a related book chapter. Joseph O’Connor, Lisa Giddings, Mitchell Ginsburg, Hatyan Shi, and Jef Strohl all provided research assistance. Other U.S. colleagues also contributed to the development of the arguments presented here, including Sam Bowles and the other participants of the University of Massachusetts Workshop in Political Economy, where I presented an early version of my arguments; Bob Begg and John Pickles, who were principal investigators with me on the NSF-funded project; Carmen Diana Deere and Ivan Szelenyi, who were my co-P.I’s on the MacArthur Foundation—funded project; and Elizabeth Wood and Gerald Creed, who read the work in progress. For all errors and other failings of the book, I acknowledge only myself.

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Introduction The Issues With the collapse of the state socialist regimes in East Central Europe, it was widely expected that collectivized agriculture in the region would quickly be remade in the glowing image of China—a patchwork of small, privately run farms yielding rapid increases in output and rural incomes. The European experience has been quite different from the Chinese case, however. Although socialist collective farms have disappeared from the East Central European

countryside, individual private farming has been slow to emerge in many places. In Romania, where land was decollectivized almost instantaneously through land grabs by the peasantry, 43 percent of agricultural land had been returned to collective forms of production by 1993 (Brooks and Meurs 1994). Forty-eight percent of agricultural land remained in cooperatives in the Czech Republic in 1994 (Ratinger 1995, 81), as did 70 percent of agricultural land in Bulgaria (BNIS 1995, 259). In Hungary, individual private agriculture grew slowly until 1992 but then developed much faster, and by 1994 only 29 percent of agricultural land was farmed by cooperatives. Still, in some Hungarian provinces, over 50 percent of arable land remained in cooperatives (HNIS 1995b). In 1998, after almost a decade of reform, just under half of all agricultural land remained in cooperatives in Bulgaria; about one-quarter of agricultural land did so in Hungary (www.nsi.bg; HNIS 1998, 380). The question of why the emergence of private farming has been so slow and uneven in parts of East Central Europe, and whether this matters, remains the subject of much debate. The debate is important for understanding the transformation taking place in East Central European agriculture. Are households not adopting private farming because it is not as financially rewarding to households as expected? Or are social or political constraints preventing

households from shifting land into higher-return private use? An understanding of the causes of the slow emergence of private farming is essential to effective policy intervention in agriculture. Further, policymakers will also need to know whether the slow emergence of private farming in certain areas is a likely cause of poor agricultural performance and distribution of rural incomes. In this volume, I contribute to this debate over the causes and implications of cooperative persistence in East Central Europe through an analysis of agricultural restructuring in Bulgaria and Hungary. These two cases present an interesting test of explanations of patterns in agricultural restructuring, be-

2 The Evolution of Agrarian Institutions cause in many ways the countries are similar. Both Bulgaria and Hungary are small, open, agrarian economies that experienced only limited capitalist development in agriculture before collectivization, had the majority of their land in collective farms during the socialist period, and promoted limited private farming in the 1980s. Despite these similarities, the two countries have followed quite different trajectories since 1989. In addition, both countries exhibit significant regional variation in their patterns of agricultural restructur-

ing, which provides the basis for two other, independent tests of the explanatory variables. The contrasting trajectories also permit an analysis of the implications of these differences in outcomes for agricultural efficiency and rural income distribution. An analysis of the emergence of private farming in East Central Europe is also related to broader questions about how and why people change their patterns of organizing economic life, questions treated by the growing new literature in institutionalist economics. I draw on this new literature in developing the analytical framework used here and return to this framework at the end of the volume, bringing the experience of institutional evolution in East Central Europe back to bear on the developing body of theory.

The Process of Change in Hungary and Bulgaria When the legal limitations on private production and landownership were removed across East Central Europe after 1989, many observers in both formerly centrally planned economies and the West believed that households would rapidly abandon collective forms of agriculture for private farming. One reason for these expectations was the experience of China in the early 1980s. The system of team farming on collectivized agricultural land began to be reformed in China in 1979, when some households in poorer regions were permitted to take parcels of collective land under individual contract, providing the state with a quota of grain at predetermined prices and structuring and disposing of the rest of production as they saw fit. By 1983, only four short years later, 98 percent of production teams had adopted the “household responsibility system.” At the same time, the state significantly freed agricultural prices, allowing prices to provide signals to households about needed adjustments in production. This reform fell far short of a complete privatization and marketization of production. Still, given a choice, most households quickly opted to produce independently and in response to market signals. Output rose rapidly as decollec-

tivization of production proceeded. According to one estimate, crop production grew at a rate of 6 percent per year during the period 1978-84, while livestock production grew at a rate of 18 percent (Lin 1992, 34-37).

Introduction 3 In the case of East Central Europe, analysts had long argued that the systems of collective farming did not yield optimal returns on inputs (Nove 1986; Pryor 1992). In contrast, the limited private farming permitted in East Central Europe before 1989 often generated higher levels of land productivity than did state and collective farms. If rural households in East Central Europe were permitted to choose their organizational form, it seemed that they, too, would further shift their efforts from collective to private production. When legal constraints on private production were removed after 1989,

however, the expected radical shift failed to occur in many places. Instead, many of those who received land placed it in newly organized producer cooperatives (often only slightly reorganized versions of the old collective farms). In both Hungary and Bulgaria in 1994, significant amounts of land remained in production cooperatives and the majority of private farmers continued to farm as a sideline on tiny, subsistence-oriented plots. But there have also been significant differences in outcomes across countries and among regions within countries. The majority of Hungarian agricultural land began to be managed as private farms, while in Bulgaria the majority of land remained in reorganized cooperative farms. In addition, many of the cooperatives in Hungary have begun to behave more like capitalist businesses than typical cooperatives, and

many of the current farm managers hope to complete the transformation of the cooperatives into typical capitalist shareholding firms over the next years (Kovacs 1996). In Bulgaria, the cooperatives continue to resemble old collective farms or, in some cases, typical producer cooperatives, and Bulgarian cooperative management has to date shown little interest in transforming the cooperatives into capitalist farms. These outcomes are somewhat paradoxical in

that political forces presiding over the land reform in Hungary were much more sympathetic to preserving some continued role for cooperative farms than were the political forces presiding over the formative period of Bulgarian reform. Both countries also exhibit significant regional variation. In both Hungary and Bulgaria, for example, outcomes in traditional grain-growing regions are distinct from outcomes in regions with an alternative production focus—

mountainous areas focused on livestock or wine grapes or peri-urban areas focused on truck farming. In Hungary in 1994, the provinces (megyes) of Somogy and Vesprem both had 38 percent of agricultural land and more than 50 percent of arable land in cooperatives, while the counties of Pest (containing the capital, Budapest) and neighboring Bacs-Kiskun had only 16 percent and 21 percent of agricultural land, respectively, and less than 30 percent of arable

land in cooperatives (HNIS 1996) (see fig. 4.1). In Bulgaria, data from the province (okrug) level are not available for the percentage of land in cooperatives, but survey data reveal similar patterns of difference. In 1994, 73 percent

4 The Evolution of Agrarian Institutions of households in the grain-growing northern counties of Silistra and Rouse planned to place all or part of their land in a cooperative, while in the southern counties of Blagoevgrad and Kurdjali, where grazing livestock and tobacco production are more prominent, only 17 percent and 22 percent of households, respectively, had such plans (BSD 1994) (see fig. 3.1). Land in these areas tended to be used as small private farms. How can these differences in restructuring between and within countries be explained? Why have households in some areas been reluctant to move land into private production? A review of possible explanations for the often slow and uneven pace of agricultural restructuring is developed more fully in chapter 2. Here I will provide only a brief sketch of my argument. While Bulgaria

and Hungary exhibit important similarities, the countries also exhibit significant differences in variables which the theoretical literature reviewed in chapter 2 suggests may also be particularly important. First, the two countries arrived at the year 1989 with very different historical experiences in private farming. In Hungary, although many remnants of feudalism remained in rural areas prior to World War II (Kovach 1999), commercial farming was widely

practiced by large landholders and a small group of commercially oriented peasants. The main political representative of rural interests, the Smallholders Party, advocated entrepreneurial commercial farming as a model for rural development. As a result, private farming offered the most visible (although not necessarily attainable) path to social mobility for the majority of impoverished smallholders and landless rural dwellers. In Bulgaria, the vast majority of land was held in small plots by poor or near poor households. Commercial farming was not an important means of overcoming poverty. The dominant rural party, the Agrarian Party, was supported by smallholders and advocated the widespread development of cooperatives as a means of improving rural livelihoods. These differences in the social norms and expectations related to agricultural production in the prewar period persisted to a certain extent in 1989

and may play an important role in the transformation and restructuring of agriculture in the future. These differences in the sociopolitical context of prewar agriculture were accompanied by significant differences in the levels of prewar market development in the countryside. In terms of both market development and orientation toward private farming, the differences between Hungary and Bulgaria continued under central planning. Collectivization was resisted fiercely in

Hungary, and the resulting structure of collective farms made significant concessions to local control and household-based production. After 1968, Hungarian cooperative managers were increasingly freed from some of the constraints of central planning and young, technocratic managers were en-

Introduction 5 couraged to run the farms as profit-oriented enterprises. A large share of labor-intensive production was subcontracted to individual households, which produced on a semi-independent basis, under the supervision of the collective farms. In Bulgaria, collectivization proceeded rapidly and relatively smoothly, and under central planning private production was largely limited to gardens to supplement household consumption. The reforms of the 1980s resulted in little real independence for the cooperative farms, and individual commercial production remained limited despite official government policy to promote its expansion. Bulgaria and Hungary thus arrived at 1989 with very different levels of preparation for further market development. These differences in market development resulted in differences in the costs associated with the development of private farming, in particular the transaction costs associated with adjusting the holdings of land, labor, and agricultural machinery. Political traditions, histories of private and cooperative agriculture, and levels of market development also vary significantly by region within each country. I will argue that these differences in social norms surrounding private farming and in levels of market development, which are explained more fully in the chapters that follow, are key to understanding the different paces

of the decollectivization of agriculture across and within countries. Differences in these variables influence the relative returns that households expect from private and cooperative forms of agriculture and thus household choices about how to use their assets. I will also argue that differences in traditional productive specializations compound the impact of these variables by exposing some farmers to higher transaction costs. These differences result in the regional distinctions in outcomes outlined previously. The comparison of the Hungarian and Bulgarian cases underscores the importance of history and geography in explaining the variation in rates of the decollectivization of agriculture across East Central Europe. The cases also suggest, however, that current policy plays an important role in the process of agricultural reorganization. Policy structures the relative transaction costs as-

sociated with private and cooperative farming. For example, the particular agrarian reform chosen by Hungary appears to have significantly reduced transaction costs in land markets and thus has sped the privatization of land. Similarly, in China the local government limited transaction costs associated with private farming by providing consolidated parcels of land and associated inputs directly to households. Policy also affects the impact that slow privatization of agriculture may have on agricultural productivity by structuring choices available to cooperative farms. Still, current policy acts on the histor-

6 The Evolution of Agrarian Institutions ically and geographically given conditions and not upon a tabula rasa. Consequently, a given policy package results in different restructurings of agriculture across the various regions. The research presented here also suggests that there will be no economic benefits of trying to impose a uniform outcome, however desirable a certain organizational form may appear in the abstract. After examining the causes of the slow and uneven pace of decollectivization, I conclude that, under some conditions, cooperative organization may improve returns to households over those attainable in private farming, even if the cooperative falls well short of its own optimal performance. Under these conditions, policies that seek to impose private farming on reluctant rural populations are likely to be both economically and politically deleterious. Improvements in agricultural efficiency and rural income distribution might be better pursued through other policies, including those aimed at equalizing the transaction costs faced by private and cooperative farms and those that assist cooperative members in redesigning cooperative incentive and governance structures.

Organization of the Book In the remainder of this volume, I develop the analysis of the causes and implications of cooperative persistence in Hungary and Bulgaria. The analysis is based heavily on survey data collected in the two countries in 1992 and 1994. This information is supplemented with data from various historical and secondary sources, including province-level data, which permit an analysis of patterns of change across counties within each country. The chapters are organized as follows. In chapter 2, I lay out in more detail the theoretical debates over the relative efficiency of private and cooperative farming and outline the model of institutional change I will use in the analysis of the Bulgarian and Hungarian cases. In chapters 3 and 4, I provide evidence on the starting point and process of the post-1989 agrarian reforms in Bulgaria and Hungary. The dynamics of the reform and the characteristics of the emerging private and cooperative farming sectors and their market contexts are examined in detail. I then test the model of cooperative persistence for each country, using a simple OLS (ordinary least squares) regression. In chapter 5, I compare the two cases and informally test the model as an explanation of the differences between the two experiences. Chapter 6 presents conclusions, including lessons that might be drawn for both regional agricultural policy and for our understanding of institutional and organizational change in general.

An Analytical Framework Introduction In this chapter, I develop a theoretical framework to explain variations in the patterns of emergence of private farming across East Central Europe. The analysis will focus on choices made by households as they respond to their socioeconomic context. This is a rational choice analysis in that I consider households to be decision makers seeking to maximize returns on agricultural assets and activities, subject to constraints. The analysis draws on recent work in the area of institutionalist economics, emphasizing the impact of locally variable transaction costs and institutions on the economic calculus of households.!

While some of the theoretical work on which I draw was developed specifically for the analysis of rural households, other work was developed to explain how people choose and change their patterns of economic behavior in other contexts or in general. I will use the framework developed in this book to analyze in chapters 3 and 4 the experiences of agricultural restructuring in Bulgaria and Hungary and to explain in chapter 5 the differences in those experiences. In chapter 6, I will return to the theoretical analysis to suggest the lessons we might draw from the two cases about the general processes by which people change their patterns of economic behavior. The emergence of private farming involves changes in both institutions (the formal and informal rules by which social activity is organized) and organizations (the groups that people form to pursue social objectives) (North 1990, 5). Within economics, the dominant explanation for institutional or organizational change has been that actors instigate such changes in response to opportunities to increase their expected returns on resources, subject to limitations set by other legal rules and informal social norms. Perhaps the bestknown version of this explanation for institutional change is found in Douglass North’s Structure and Change in Economic History, where North explains the institutional changes resulting in what he terms the First and Second Economic Revolutions (changes in property rights and in forms of state and voluntary governance) as a response to new earnings opportunities (1981).7 In East Central Europe prior to 1989, there were many reasons to believe that returns in collective farming could be improved upon and that people would develop private farming if legal constraints on private activity were 7

8 The Evolution of Agrarian Institutions lifted. Central planning often set inappropriate production tasks for farms or failed to deliver needed inputs to the farms on time, both of which lowered returns. But collective farm performance was often also hurt by organizational failures within the farms themselves. Socialist collective farms tended to have highly egalitarian pay structures, and members were rarely residual claimants (recipients of all net income), even collectively. Instead, the difference between revenues and costs was heavily taxed by the central state (Meurs and Djankov

1998), which reduced the incentives for work effort for both managers and workers. Efforts to link pay to work performance through the use of supervision, norms, and bonuses were particularly complicated in agriculture: workers are often dispersed over a large area, land is heterogeneous, and results of work can only be seen long after the task is performed (Lin 1999; Carter 1987).° This situation provided opportunities for workers to free ride on the efforts of others—contributing minimal levels of effort to the collective enterprise but collecting a full wage (Vasary 1997). Low levels of work effort undermined farm performance. Farm management also suffered because of weak incentives. While managers salaries were often linked to farm performance in principle, central planners had poor information about actual conditions on the farms. With the prevalence of planning failures and input shortfalls, managers could often claim that poor performance resulted from problems external to the farm, making the link between salary and performance hard to enforce and resulting in the extension of credit to cover enterprise losses (the infamous “soft budget constraint”) (Kornai 1982). Collective farm members and workers, who had relevant information about farm conditions, often had little power to use this information to evaluate or reward management. In any case, the soft budget constraint and the weak link between farm performance and workers’ wages undermined worker-members’ incentive to play this role. Private farming offered an apparent solution to many of the problems of centrally planned agriculture. Most obviously, private farmers would not be subject to the same degree of control by central planners and would be freer to use locally available resources and information to organize production. In addition, as residual claimants, private farmers would have strong incentives to work hard to improve farm performance. Where farmworkers were family members, social pressure could provide a strong additional incentive for quality work. Private farms that were smaller than the extensive collective farms also might facilitate the monitoring of work, even in the case of hired labor. As work effort increased, so would returns on farms, providing an incentive for more rural households to develop private farming. Empirical evidence from centrally planned economies offers some support for these arguments. Fred Pryor, in his comprehensive review of collec-

An Analytical Framework 9 tive agriculture in the 1970s and 1980s, found that the combination of poor planning and weak incentives contributed to slow growth of total factor productivity (output per unit of all inputs combined) in socialist agriculture— growth rates below those achieved in nonsocialist agriculture over this period (1992). In a study comparing the performance of the socialist and private sectors in Poland, Yugoslavia, and Bulgaria from the 1960s to the 1980s, Michael Boyd found that on small-scale farms private producers in Poland and Yugoslavia generated total factor productivity that was 2-15 times the level in socialist farms.* In Bulgaria, where the private sector was too small for a mean-

ingful comparison, Boyd showed that socialist farms produced high productivity growth rates in the 1960s but that productivity growth for all inputs had fallen to negative levels by the 1980s (1991). In response to disappointing performance in the socialist sector, many states slightly loosened restrictions on private agriculture in the 1970s and 1980s. Ever since collectivization started in the 1950s, collectivized rural households in both Hungary and Bulgaria had been permitted to privately

farm small plots (initially under 0.5 ha) for household use (BNIS various years; HNIS various years). Households generally grew vegetables, fruit, and a small amount of grain as feed for the few livestock they were also permitted to keep. In the 1970s and 1980s, the land and inputs allocated to households were expanded slightly, some state assets such as greenhouses and livestock barns were leased to private producers, and households not employed in agriculture

were for the first time permitted to farm small plots. Households were permitted to market more production from their plots, either through government channels or in farmers’ markets, where prices were not fixed by planners. Increased access did not imply unlimited rights to produce privately, however. The state mandated that most land and machinery remain in the collective sector. Until 1989, the use of marketing middlemen was also prohibited, limiting

farmers to sell to the state or to market what they could transport and sell themselves.°

Despite the limitations, many households shifted their energy into private agriculture in the 1970s and 1980s. In Bulgaria in 1986, 94 percent of village dwellers participated in small plot production (Institute of Sociology 1986), farming about 13 percent of arable land. Although this was about the same share of land cultivated by private households in 1971 (BNIS various years), private production had intensified in response to state encouragement. Private household production rose from 21 percent of agricultural output in 1971 (BNIS 1977) to 29 percent by the mid-1980s (Vulchev and Pamukchiev 1988). In Hungary in the 1980s, almost 90 percent of all rural dwellers participated in small-scale private farming. The share of land farmed by private households fell 23 percent over the decade 1972-82 as older households, which

10 The Evolution of Agrarian Institutions held larger plots of land, retired and turned land over to the collective. But even as the share of arable land farmed by private households fell, output from family plots grew 10 percent from 1970 to 1981. To boost private output, farming

households spent less time in paid work for the state and more time in sideline production (Szelenyi 1988, 31, 36).° Further shifts of resources from collective to private production were limited, however, by continued state limits on property ownership and access to other inputs. Recent studies of the Chinese decollectivization show an even more pronounced response by households to increased opportunities for private farming. From 1978 to 1981, the Chinese state tolerated increased local experimentation with household farming, and by 1981 45 percent of collective production teams in China had been replaced with household production. In late 1981, official support was given to this policy, and within two years 98 per-

cent of production teams had been voluntarily restructured into household production (Lin 1992, 37). Some analysts have attributed much of the burst in agricultural productivity during the period 1978-84 to this shift from collective to family farming (Lin 1992).” Of course, to call household production in this period “private” is a bit misleading. In both Hungary and Bulgaria in the 1970s and 1980s, much of the privately farmed land continued to belong to the state and the production of collective farms and individual households was highly integrated. For ex-

ample, collectives provided machine services, inputs, and technology to household producers at minimal cost and in turn marketed at least part of household production (Harcsa, Kovach, and Szelenyi 1993; McIntyre 1988). Even in China, local governments continued to supply important mechanized services and inputs to households at subsidized rates and to dictate certain production tasks and prices (Putterman 1993). Still, in all three countries, the production was voluntarily organized by the households and relied on household labor. As residual claimants, households gained increased supplementary income in cash and kind. The Chinese experience and household responses to socialist reforms in East Central Europe seemed to suggest that, in the late 1980s, only the con-

tinued state restrictions on private production prevented rural households from shifting all or most of their resources and energies into private production. If these restrictions were lifted, many analysts expected that households would quickly complete the shift. The changes of 1989 did bring an end to state restrictions on private ownership and production. But by 1994, after five years of liberal reform, the shift to private production had occurred only to a

limited extent and great differences remained in the degree of adoption of private farming across and within countries. How can this slow response be explained?

An Analytical Framework 11 Explaining Cooperative Persistence: Economic Rationale of Households In this chapter, I consider the explanations for cooperative persistence that are consistent with the theoretical framework outlined earlier. Households are expected to adopt new organizational forms when these forms will increase expected economic returns. A change in organization could increase returns by reducing either the production and transaction costs (costs of organizing and

enforcing exchanges needed to carry out production) (Eggertsson 1990) or both. Relative input and output prices might change under the new organization, productivity might be improved, or exchanges of resources and goods might be made less time consuming or costly.® An explanation for the slow and uneven shift to private farming, therefore, is that private farming has not, through any of the those mechanisms, consistently offered higher expected returns to households than collective farming. There are a number of reasons why this may be the case, despite the apparent benefits of private farming seen under central planning. We now examine these in detail. First, it may be that the success of private farms over collective production under central planning was simply an artifact of the demand and price structures of central planning. Boyd’s study of Poland and Yugoslavia suggests

that, while private farms offered higher total factor productivity on small farms, the collectivized farms had access to capital and economies of scale that were not available to the small farms, and these contributed to higher total fac-

tor productivity in the socialist sector as a whole (1991). But under central planning, private producers may have been able to cover their higher production costs with higher product prices. Central planning generated the notorious “shortage economy” (Kornai 1982), including consistent shortages of such consumer goods as fresh fruit and vegetables, meat, and milk. Robert Koopman (1991, 40) estimates that in 1986 excess demand for livestock products in the Soviet Union varied from 7 percent for butter to 24 percent for mutton. Private producers benefitted from this situation when the state, unwilling or

unable to meet demand for produce and livestock products, encouraged households to fulfill excess demand through production on private plots, offering them prices above those paid to state and collective farms for the same products or permitting sales in the farmers’ markets (Swain 1987, 31). Of course, some products brought even higher prices in the black market. Household production does seem to have been structured to capture these benefits.? In Bulgaria, for the period 1973-89, private households produced just over 50 percent of potatoes, squash, and eggs; just over 40 percent of meat; but under 3 percent of wheat and around 10 percent of barley, oats, and rye (BNIS various years). In Hungary in 1980, private producers produced

12 The Evolution of Agrarian Institutions 58 percent of hogs, 45 percent of poultry, 53 percent of vegetables and fruit, but only 13 percent of grains and legumes (O’Relley 1986, 12).

Since the collapse of central planning, conditions have changed. The opening of formerly socialist economies to the global market has flooded do-

mestic markets with cheap foodstuffs imported from the European Union (where producers benefit from government subsidies) or from low-wage economies such as Turkey. At the same time, domestic demand for food products has fallen as incomes have collapsed (Begg and Meurs 1998). Nominal price increases for the vegetable and livestock products produced by private

households have fallen well behind the increases in industrial good prices (HNIS 1994a, 198; BNIS 1993, 81-82). These are changes with which the successful Chinese farmers have not yet had to cope. In addition, despite a rapid increase in unemployment levels after 1989, informal labor markets have expanded quickly, raising the effective cost of unpaid household labor in some places. With prices paid to private household producers no longer artificially inflated and household labor no longer captive, small plot production may not always offer returns to households that are sufficient to cover costs. Alternatively, it is possible that small plot production does offer adequate returns to households but only in certain crops. The average size of private, noncorporate landholdings is still small in East Central Europe (averaging 3.4

ha in Bulgaria and 3.6 ha in Hungary in 1994) (Meurs and Spreeuw 1997; HNIS 1993, 174, 176).'° In collectivized agriculture, the production of certain crops, including grain and occasionally some forms of livestock, was completely mechanized and exhibited significant economies of scale under the existing technology (Paarlberg 1992; Boyd 1991; Piesse, Thirtle, and Turk 1996). Other products such as tobacco, certain fruits, vegetables, and most types of livestock either did not receive the capital investment necessary to mechanize production or did not perform well under large-scale mechanization. This sit-

uation remains largely unchanged, since little credit has been available for technological change in agriculture since 1989, and the majority of farmers— private and collective—continue to rely on technology and machinery from the pre-1989 period. As a result, large producers may have significant productivity advantages in grain crops and certain types of livestock farming, giving households little

incentive to reclaim their small plots for private use in areas best suited for growing grain or raising dairy cattle.'! Households with small plots in tobacco-growing regions or areas close to urban vegetable markets, on the other hand, may find that they have advantages in labor productivity and can compete effectively with larger cooperative farms. They may thus have significant incentives to remove land from collective production. Given the importance of grain production in both Bulgaria and Hungary (about half of all agricul-

An Analytical Framework 13 tural land in Bulgaria and Hungary was under grain in 1986) (BNIS 1987, 548; HNIS 1987), this logic may explain the hesitation of a large number of households in some regions to move their land from collective to small-scale private

production. Both of the arguments discussed suggest that it is the small scale of private producers that prevents them from earning returns equal to those on collective farms, despite their potentially superior incentives. If private households could organize larger farms, their appeal might be greater in some areas now dominated by cooperatives. Under the new conditions in Hungary and Bulgaria, however, market transactions in land and equipment (both renting and selling) are legal. In principle, therefore, private producers can achieve the same scale and technology of production as collective producers. Given the potential incentive benefits of private farming outlined earlier, what other factors could be keeping returns on private farming low relative to those on collective farms and thus preventing such a switch? One possibility is that the relative labor productivity problems in cooperative farms have been overstated in the literature. First, it is important to distinguish the collective farms—which were subject to significant government intervention or even control and usually offered no opportunities for members to leave with assets—from the reorganized cooperative farms, in which management is subject to minimal government regulation and members are residual claimants with legal rights to withdraw land or (sometimes) sell asset shares if they are dissatisfied with their fellow members or with farm management. The new farm structures may improve members’ motivation to work and their ability to monitor management. Problems with monitoring work effort may still exist. But a number of authors have shown that it is possible to design adequate incentive and monitoring schemes for cooperatives. Others have shown that these schemes are likely to be chosen by cooperative members, if the cooperatives have effective and democratic governance structures, so that residual claimants can take positive action to adjust wages and supervision to meet efficient levels (Putterman and Di Giorgio 1985; Putterman and Bonin 1993; Ireland and Law 1988) and, if a sense of solidarity exists among cooperative members, so that commitments will be honored (Ostrom 1990; MacLeod 1987). In addition, private farms that are large enough to require the use of hired labor or management will face the same monitoring problems as do cooperatives (Meurs 1993a). Private firms, however, cannot replicate the effective incentive schemes used in cooperatives for at least two reasons. The first reason is because of the information asymmetries between owners and hired workers. Both private enterprises and cooperatives can use profit sharing to motivate workers, and workers in both types of profit-sharing enterprises would

14 The Evolution of Agrarian Institutions benefit from monitoring to limit shirking. As a result, they might accept lower

wages in exchange for better monitoring and a share of the profit. But only workers in cooperative firms can make such a bargain, since a private owner's promise to hire such monitors is not credible—the owner could promise monitoring in order to convince workers that additional work would be rewarded and then keep for himself the money promised for monitors (Ireland and Law 1988). Workers in private firms could never be sure that they were not being suckered by other workers, so profit sharing could not generate adequate effort. In cooperatives, where all workers are also owners, information on monitoring would be accessible to all, increasing workers’ certainty that others’ shirking would be punished. A second reason that private firms cannot repli-

cate cooperative incentive schemes is because the solidarity that helps to enforce self-monitoring of commitments is more likely to develop in cooperative firms (MacLeod 1987), due to the ongoing nature of members’ relationship as co-owners of capital (Putnam 1993). If cooperative farms adopt new, democratic governance structures and efficient monitoring, there may be few incentive benefits to private, large-scale production. This may explain the persistence of cooperatives, as least those whose products are likely to require hired labor to achieve scale economies. !* As an additional benefit, the new cooperatives may improve expected returns over those possible in private farming by allowing households to pool risk. Farmers face risk due to weather, pests, and stochastic changes in agricultural prices. If farmers pool sufficiently varied land into cooperatives, or use

increased scale to diversify production, the increased diversity of income sources reduces individual risk (Kimball 1988; Carter 1987). Survey and field data from new East Central European agricultural cooperatives, however, suggest that to date they have not developed the strong democratic cultures and governance structures necessary for effective labor incentives and monitoring of management. Members rarely participate in the design of pay and monitoring schemes, and farm managers are rarely subject to discipline by members for poor performance (BSD 1994; Brooks and Meurs 1994). Instead, labor relations and management styles in Bulgaria continue to resemble those under central planning (ABBC 1996), while in many Hungarian cooperatives they have already begun to resemble those more typical of capitalist corporations (Kovacs 1996). Medium-sized private farms, in which labor and management are mainly provided by the owners and residual claimants and where the limited hired labor can be relatively easily supervised in the course of normal work, may achieve superior labor incentives under these conditions. Advantages from risk pooling also seem minimal since the major production risks in the transition period are due to unforeseen demand and price fluctuations, which the cooperative farms are not sufficiently diversified to diffuse.

An Analytical Framework 15 In the chapters that follow, I will argue that the main reason for the persistence of collective farming in parts of East Central Europe does not lie in the explanations already offered, although all of these may play some part in the current dynamics. I will argue instead that the most important explanation for differing patterns of collective and private farming lies in the relative transaction costs of organizing private and cooperative farms.'° High transaction costs may prevent the organization of large-scale private farms that could compete with cooperatives in the production of grain and other products that exhibit economies of scale under current technology. Further, in the current context, cooperatives may also be able to secure preferential prices for inputs and products, providing an additional means of raising returns. The basic outlines of this argument follow.

In the immediate postreform period, many East Central European households have found themselves with combinations of land, labor, and capital that result more from historical accident than from conscious choice. In Bulgaria, beginning in 1991 all previously collectivized land was restituted as private property to its 1946 owners or their heirs, regardless of their interest in farming. Collective farm assets were either distributed to members, former members, or their heirs, or the assets were sold at auction and the proceeds distributed to the same group. The farms were completely liquidated. When those in charge of the liquidations decided to simply distribute the assets, many households, including urban households, suddenly found themselves in possession of a restituted cow or other odd asset. Where assets were auctioned, rural households often used their projected share of proceeds (share coupons) to purchase farm assets at low prices. Even in this case, the acquisition of assets often had little to do with intended use, however. Instead, households

exchanged their coupons for anything that might have value in the postcollective era.

In Hungary, the legal basis of agricultural transformation resulted in a slightly less chaotic distribution of assets. Land was not restituted to former owners. Instead, households that had lost land or assets to collectivization were offered compensation coupons, which could be used to purchase land formerly held by cooperatives or a variety of other assets, including homes, government annuities, or shares in other state enterprises. Cooperatives set aside some 40 percent of their land for purchase by coupon holders, retaining ownership of the remaining 60 percent of their land. Nonland assets of the collective farms (animals and farm machinery) became the legal property of the farms, which were not liquidated. The farms were transformed into legally independent cooperatives (after which some did choose to liquidate or were forced to do so by creditors). As in Bulgaria, however, many of the households in Hungary that purchased land had no intention of farming it.

16 The Evolution of Agrarian Institutions Some households simply got caught up in the excitement of auctions, a central event in small, rural communities (Swain 1997). Other households chose to invest their coupons in land as a store of value in inflationary times or out

of the romantic association of landownership with independence and autonomy (Vasary 1997). Even those households hoping to engage in farming had only a few coupons to invest, and many were unable to buy the amounts of land or contiguous parcels they desired.

As a result of these processes, in both Hungary and Bulgaria many households have too little land to form an efficient production unit, while other households have more land than they are interested in working. Further, many households wishing to farm their land are unlikely to have machinery appropriate to small- or medium-scale farming and are unlikely to have established contacts in the highly concentrated input or product markets. Where markets for land, credit, machinery, and outputs are well developed and competitive, individual households can easily adjust their farm size and capital through them. Cooperative production should offer no particular advantages, and private production might be expected to flourish. Where markets for inputs and agricultural products are poorly developed, however, individual households may face high transaction costs in adjusting resource holdings and production. The transaction costs derive from a number of sources. In both Hungary and Bulgaria, households that receive land also receive legal title and may transfer land through markets. Titling has gone slowly in Bulgaria, however,

and fragmentation of ownership further complicates the development of land markets there. A private farmer wanting to obtain a large, contiguous parcel suitable for mechanized farming may need to negotiate contracts with many individual owners. These owners have varied expectations about prices, and potential farmers lack information about land quality. The costs of negotiating contracts for the lease or sale of land are likely to be quite high in this context. As is well known, information asymmetries cause credit and insurance markets to develop more slowly and less competitively than do markets for other inputs and products. Conditions in agriculture tend to exacerbate these information problems (Binswanger and Deininger 1997, 1963-1964), and covariant income risk further reduces potential returns to credit and insurance providers. In transition economies, information asymmetries are particularly severe. Without such things as statistical information about the likelihood of repayment by various classes of private borrowers, specific information about individual borrowers, information about land quality and value, and an effective local court system for handling defaults, transaction costs for private farm-

An Analytical Framework 17 ers seeking to borrow or insure are likely to be high (Schreider and Heidhues 1997, 7ff.). If credit markets and insurance are not competitive, small individual borrowers face a disadvantage in bargaining with large, concentrated lending institutions, further raising their cost of credit (Heidhues et al. 1997, 1). Where markets for other inputs and products are not competitive, this may also raise costs to private producers. In a post—central planning context, markets for agricultural chemicals and for many agricultural products have remained highly concentrated. Compared to large cooperative farms managed by members of the former nomenklatura, new, private producers have few connections to or bargaining power with these monopolies and monopsonies. As a result, prices offered to private producers may not reflect the best possible exchange (Brooks and Meurs 1994). The high transaction costs faced by private producers seeking to adjust farm size may explain the continued preference for cooperative farming in some places. Cooperative farms may face equally uncompetitive and weakly developed markets, but cooperatives have two advantages in dealing with them. First, many cooperatives have retained extensive resources from their previous incarnation as collective farms and thus have avoided using markets to organize production. In Hungary, this was possible because the old collective farms were not liquidated. The transformed cooperatives kept 60 percent of their land (Agnocs and Agnocs 1994, 42). In Bulgaria, keeping collective farm assets intact was more complicated, since all land was restituted and all nonland assets liquidated. In many cases, however, villagers pooled their share coupons to collectively purchase farm assets (a tactic also used by Hungarian cooperative members to further defend cooperative holdings). Old collective

farm managers or prospective new cooperative managers often used their political position in the village and village facilities (such as the town hall) to convene groups of villagers to discuss such strategies. These same actors also coordinated efforts to pool newly restituted landholdings into “new” cooperative farms. Individual households could not generally replicate these bargained solutions to acquiring land or capital.'* Second, many cooperatives also benefitted from retained social capital, in the form of “old boy” networks and norms of behavior in those networks, which provided advantages in negotiations with input suppliers, creditors, and processing firms. Under central planning, where goods were always in short supply and money could not assure access to them, “connections” were the main currency of collective farm managers and other village officials. In the post-1989 period, there has, of course, been some significant turnover in farm and firm management. But especially in rural areas, where skilled labor is limited, turnover has mainly been characterized by reshuffling—the collective farm manager’s son has become the mayor, the agronomist has become the

18 The Evolution of Agrarian Institutions cooperative farm manager, and so on. The “old boys” are mainly still in place, and in a context of highly imperfect information about the reliability of exchange partners, their old stores of social capital continue to facilitate transactions. One example of the use of social capital is in credit markets, where, as noted earlier, statistical information about the likelihood of repayment by various classes of borrowers is not available. Information about the reliability of

members of the old networks may be more easily obtained, however, and lenders whose loans are not repaid can, in turn, use these networks to punish defaulters. Membership in the old networks may thus reduce transaction costs in credit markets. In their study of firm contracting in Bulgaria, Kenneth Koford and Jeffrey Miller find evidence to verify that firms do maintain previously successful relationships because of their information value (1995). In Hungary, too, cooperative farm managers have used old ties to bank officials to renegotiate loan conditions on favorable terms (Kovacs 1996). There are thus a number of reasons why the costs of organizing mediumor large-scale agricultural production may be higher for private farmers than for cooperatives. Significant cost differences may outweigh any labor productivity advantages that medium- or large-scale private farms have over cooperatives, keeping returns to cooperative farming above or near those of private

farming and reducing incentives for households to switch organizational forms.

Explaining Cooperative Persistence: An Alternative Explanation I have so far considered possible reasons why private production may not provide the expected increase in returns and thus may not motivate households to shift organizational forms. One other explanation for the slow and uneven pace of reform remains to be considered. Perhaps private production would

offer higher returns to households, but institutional constraints prevent households from making that choice. Legal constraints on private production have been lifted, but could informal constraints in the form of social norms and pressures continue to limit households’ choices?

Increasing numbers of economists have focused on the role of such norms in slowing or preventing changes in economic institutions or organizations. One way in which social norms may affect economic change is by limiting the types of solutions that agents consider to only those readily available and accepted in their historical and social context (Elster 1989; Folbre 1991; North 1990). If, for example, collective forms of production are more familiar

An Analytical Framework 19 to, and accepted by, households than private forms of production, households may not bother to evaluate returns to private production but instead simply organize production along familiar lines. Alternatively, households may consider relatively unknown organizational or institutional arrangements and make the relevant calculation about rates of return. But in their calculation they may need to include, in addition to the production and transaction costs involved in each arrangement, the social costs that they would pay for experimenting with arrangements that violate social norms. Taking into account these costs, yields in cooperative farming may appear higher than those in private farming, even if private farming has no transaction cost disadvantages or productivity advantages. Wegren (1994) and Thiesenhusen (1995) have argued that such cultural impediments have undermined the development of private farming in Russia. Collectivist norms developed in the socialist period or held over from the prewar period may have played such a role in Hungary and Bulgaria as well. Clearly, social norms change over time, and many new institutions are eventually adopted to replace old, accepted ways of doing things. But such change may initially involve significant costs—in terms of social disapproval, setting up and learning to use new institutions, and the risk of failure in doing so. Large margins may need to exist between economic returns to old and new ways of doing things before these offset social costs and before agents become willing to experiment. The overall impact of economic factors and social norms on households is depicted in the solid lines in figure 2.1. Information and, in turn, market development affect the relative transaction costs of organizing the two forms of

production. These affect the production costs faced by the two forms by influencing the scale of production. Relative production costs are also influenced by labor and management incentives. Finally, norms add social costs to the total costs of production. As these factors influence overall returns on production, they in turn affect household decisions and the rate of decollectivization of agriculture.

Of course, the causal relation between production costs, transaction costs, and social norms is more complex than that depicted by the solid lines in the figure. As more agents find it advantageous to adopt an innovation, it may become harder to consistently enforce social (and even legal) sanctions, thus reducing the costs of adoption for additional individuals and ultimately eroding the social norm. At the same time, an increase in the number of households experimenting with private farming will promote the expansion of input markets, thus lowering the transaction costs for future innovators. These dynamics are depicted by the broken lines in figure 2.1. So what does this framework tell us about the emergence of private farm-

20 The Evolution of Agrarian Institutions

=| =Oe )|~ | Returns a N

‘\

Labor &

—_

Management Costs Incentives Fig. 2.1. A model of household choice of organizational form

ing in East Central Europe? The framework suggests, first, that we can expect areas in East Central Europe where markets for agricultural inputs and outputs are weakly developed to raise the relative costs of private farming. The high relative costs will slow agricultural restructuring. Second, the framework suggests that in the parts of East Central Europe that have a history of collectivist social norms, these norms may raise social costs of private farming and thus also slow change. Third, the evolution of cooperative governance structures will affect the performance of cooperatives and thus the relative returns to private and cooperative farming. The impact of these factors on the emergence of private farming, however, is not likely to be uniform across regions of East Central Europe. Social norms differ widely among countries and even among regions within a country. In addition, the need to use markets to adjust farm size and market products varies by location and product type, as do the problems of labor incentives in cooperative and private farming. Finally, this framework suggests that even where high transaction costs and social norms discourage private farming, they are not likely to halt its emergence altogether. With each household that finds it advantageous to shift resources into private farming, the transaction costs and social sanctions faced by private farmers will likely be reduced. The shift to private farming is therefore likely to accelerate over time. This does not imply, however, that we expect cooperative forms of farming to be completely replaced by private farming in East Central Europe. Certain transaction costs faced by small private farmers

An Analytical Framework 21 are likely to persist for some time to come. The early dominance of cooperatives may also convey other advantages that persist as markets develop. One common form of such a “first mover” (Scherer and Ross 1990) advantage— size advantage in a context of decreasing costs—seems unlikely to play an important role. While agriculture does exhibit economies of scale, these tend to be relatively quickly exhausted (estimates for the United States suggest that farms the size of 120-200 ha capture most scale economies) (Strange 1988, 80ff.) and do not generate the kind of cost-reducing positive feedbacks (Arthur 1990) that would convey permanent advantage. A more relevant type of advantage of early dominance may be the integration of cooperatives into new or evolving older networks of large producers, suppliers, processors, and government agents. Even as markets develop, these networks may continue to convey bargaining and transaction-cost advantages to members (North 1993, 11). In addition, with time and organizational development, the cooperatives may produce some of the incentive benefits that economic theorists have expected from this form of organization. Cooperatives have not become a dominant form of agricultural production in developed market economies,'” but in those contexts, the tables are turned. They have had to experiment with innovative democratic management techniques and raise capital while competing for markets and capital against firms using established management practices and ownership structures familiar to major lenders. This situation has given the cooperatives relatively higher transaction costs compared to private forms of organization. The resulting learning costs in management and un-

equal access to capital create an almost insurmountable barrier to entry (Bowles and Gintis 1993). Cooperatives in East Central Europe will be developing cooperative management techniques while competing with firms only

just developing hierarchical techniques. And unlike cooperatives in market economies, which are disadvantaged in capital markets, cooperatives in East Central Europe may have easier access to credit than will many private firms. The resultant tipping of the playing field may allow cooperatives to capitalize on the informational and motivational advantages they promise over traditional labor-hiring firms. Finally, cooperatives are likely to persist where social norms of collectivism and security continue to dominate over individualism and entrepreneurship. The evolution of norms is subject to conflicting dynamics. On the

one hand, where a change in norms is likely to raise economic returns significantly, some individuals may be motivated to violate norms to capture the gains. If enough individuals illustrate the benefits of norm busting, the motivation and ability to enforce the norm may erode, as in the Kenyan case examined by Jean Ensminger (1992, 167ff.). On the other hand, norms which prevent the improvement of economic institutions often persist (North 1990).

22 The Evolution of Agrarian Institutions One possible reason for this is that the benefits of norm change will not be evenly distributed. If the parties who would lose from norm change are more powerful than those who would capture the gains, changes may be prevented (Knight 1992). In some parts of East Central Europe and the former Soviet Union, those connected to collective forms of farming have seen privatization as a threat to their economic and social position and have fought hard against change (Thiesenhusen 1995). They may continue to do so.

Implications for Efficiency and Distribution Because of the incentive benefits attributed to private farming, and perhaps also because of the Chinese experience, many analysts expected the shift to private production to increase agricultural efficiency. Does the persistence of cooperative farming reduce the efficiency of agricultural production? In evaluating agricultural restructuring in East Central Europe, I want to begin by abandoning the “nirvana approach” (Demsetz 1969)—the compari-

son of the outcomes resulting from imperfectly organized real forms of production to the outcomes resulting from idealized alternatives and the labeling of outcomes that fall short of idealized results as inefficient. In East Central Europe, when the outcomes of idealized private production under perfectly functioning markets are compared to incentive problems found in existing forms of cooperative production, the latter will be found wanting. Recognizing that real markets in East Central Europe (and elsewhere) are often characterized by incomplete information and high transaction costs, and that social norms may constrain agents’ choices, the efficiency of cooperative farming appears in a new light. If private farmers face high transaction costs and social sanctions, it may be that cooperative farming maximizes returns in the current context, despite persistent incentive problems. If so, it may be a second-best solution to the allocation of household resources— better than any available alternative but inferior to one that is conceivable but not available. '!°

While cooperatives may allow rural landholders to increase the returns on their assets over those attainable in private farming under the current conditions, the current functioning of cooperatives may still be a cause for concern to those wishing to raise rural incomes and agricultural productivity. This

is because the very conditions that make cooperatives attractive to rural households—the absence of developed, competitive markets in agricultural inputs and products—also allow cooperatives to extract rents from landholders and avoid efficiency-enhancing adjustments in governance structures and production.

An Analytical Framework 23 Rent/ha. MC, S1

VMP, A Ri f/f “\B

: : VMP, : : Q land rented

: in village. Q, 2 Fig. 2.2. Impact of cooperative monopsony on land markets

A simple version of this problem is illustrated in figure 2.2. If cooperatives offer zero returns to landholders, households may offer no land to cooperatives. Unable to adjust production through markets, households may simply farm as much of their land as they can given their other resources and leave the rest fallow. But if households face serious difficulties in forming viable private farming units, their reservation price for land will be low. In some places,

cooperatives may need to offer only minimal returns to households in order to obtain all land beyond what households need for subsistence production, generating the supply curve for land illustrated in figure 2.2. Given the underdeveloped state of credit markets and high nominal interest rates, cooperatives (like households) face a nearly fixed supply of capital in the short run, producing a downward-sloping marginal revenue curve for land as illustrated in the figure. Existing cooperatives also face limited threat of new entry into farming due to the high transaction costs for new entra nts and scarcity of organizational capacity. Existing cooperatives, having a local monopsony, choose to produce at point A. This situation creates three undesirable outcomes. First, rural households may not receive the full value of their land if it is above their reservation price. They receive R| instead of R.. Second, land that would be used productively

under more competitive market conditions (quantity Q-Q_) goes unutilized. Finally, there may be little pressure on cooperatives to produce efficiently. Any gap between the supply price of land and the potential average revenue creates a rent that can be used to cover inefficiency.”

24 The Evolution of Agrarian Institutions This suggests that, while cooperatives may persist because they can offer benefits to households over private farming, significant welfare gains are pos-

sible. Policies that facilitate entry into farming could support these welfare gains, regardless of whether the entrants are new cooperatives or private farmers. Policies that promote the development of democratic governance structures in cooperatives could also improve outcomes.

Expanding Markets: Feasibility, Benefits, and Costs If the argument presented here is correct (it is evaluated in the following chapters), one way to support entry into farming would be to promote an expansion of markets in land, credit, and other agricultural inputs, as well as in the processing and distribution of agricultural products. Such development could reduce the transaction costs faced by private farmers and by newly forming cooperatives. Factors that facilitate market development are imperfectly understood. Clearly, the evolution of norms plays a role (Ensminger 1992). Information is also important since a lack of information will raise transaction costs and reduce the gains from market exchange. A few simple policy changes could increase available information and reduce the transaction costs in some important areas. Information problems related to credit market development could be reduced by speeding up the titling of land, by decentralizing bank branches, and by creating legal guidelines for revolving credit schemes and other local, user-controlled forms of credit extension (Schreider and Heidhues 1997, 9). Village land exchanges, modeled on existing labor exchange offices, could

provide a forum for consolidating parcels and centralizing information on land prices and quality and could thus facilitate the private exchange of land. Some evidence that such policy would be effective in fostering land markets may be found in the comparison of the Hungarian and Bulgarian cases. In Bulgaria, where all landownership was restituted in tiny plots to millions of individual households, land markets have been very slow to develop. In Hungary, however, large quantities of land were retained by restructured cooperatives. These cooperatives provided a single, well-known source for land leasing. Disadvantages of having to bargain with a near monopolist may have been outweighed by the benefits of bargaining with one well-informed supplier over a single contract for a large, contiguous parcel. In the early years of the Hun-

garian reform (through 1992), cooperatives were the main source of land leases for emerging commercial farmers. The cooperatives leased land back from new smallholders unable to farm the land themselves, allowing potential large, private users to avoid the coordination problems of bargaining with

An Analytical Framework 25 multiple small agents, even when the land originated with those agents. An active land market emerged quickly in Hungary, and large amounts of land are now moved from owners to users through rental markets. Credit market development and strict enforcement of price-fixing legislation could also assist in market development by facilitating the entry of new firms into the processing and distribution of agricultural products. Such new firms might be more likely to look beyond the big, established agricultural pro-

ducers to new suppliers of agricultural products and might find bargaining advantages for themselves in dealing with smaller, less-established producers.

These developments in agricultural markets would help bring down transaction costs faced by private farmers and start-up cooperatives, speeding the entry of new producers and reducing the organizational rents currently captured by established cooperatives. This, in turn, would encourage increased efficiency in the cooperative sector, better land use, and increased payments to landholders. Evidence from the Hungarian case suggests that markets need not be very deep before they can be effective in reducing transaction costs to a level that allows private farmers to compete with cooperative farms for land in a given region. Once such competition is established, demand for and returns to land are likely to rise, in turn putting pressure on cooperatives to improve efficiency.

The expansion of land markets provides no silver bullet for distributional

and efficiency problems, however. As experiences in Latin America have shown, the expansion of land markets can also increase distributional problems in agriculture. The distributional impact of land market development varies, depending on a variety of conditions, including the existence of markets for complementary inputs, the initial distribution of land, geography and crop type, and structures of local power. Well-developed insurance and credit markets are particularly important to improving distributional outcomes of land markets, since without insurance and credit poor households may be forced to sell their land to cover income shortfalls but may be unable to obtain credit necessary to buy land in good times. Under these conditions, land markets will result in a concentration of income and wealth in rural areas (Vogelgesang 1996, 97). The distributional problems can, in turn, undermine dynamic efficiency, as poorer farmers become unable to make needed investments in agriculture (Binswanger and Deininger 1997, 1967-71). A study of the impact of land markets in Latin America finds that not all land loss resulting from land market development worsens income distributions (Vogelgesang 1996). In Colombia, the development of land markets appeared to transfer land mainly among members of the same economic stratum, having little impact on overall land distribution (FAO 1995). In Chile, a similar study found that about 40 percent of sales by poor rural households

26 The Evolution of Agrarian Institutions were not motivated by a short-term need for cash but rather by a desire to leave agriculture for other work or because of advancing age and the lack of heirs interested in farming (Vogelgesang 1996, 109). In addition to developing agricultural markets, policies aimed at the existing cooperatives can also be used to improve agricultural efficiency and the income of smallholders. Global experience with agricultural and other producer cooperatives has generated a broad base of knowledge about effective incentive and governance structures, and this information could be disseminated with the assistance of international cooperative agencies. The introduc-

tion of appropriate shareholding, pay, and monitoring structures could improve effort levels of labor and management. At the same time, more active participation in cooperative management by members could increase incentives for managerial performance and force managers to pay members a fair return on assets. Well-designed share structures will also help prevent decapitalization and encourage adequate investment in the agricultural sector (Thomas and Logan 1982, 23-25).

Summing Up It was widely expected that, once East Central European rural households were freed from legal constraints on private farming, they would quickly move assets out of collective farms and into private production. Yet the movement into private farming in East Central Europe has been slow and uneven. In many

places, the old collective farms have been transformed into cooperatives, which continue to dominate agricultural production. The theoretical framework outlined in this chapter suggests a two-part explanation for the persistence of cooperative production in East Central Europe. On the one hand, scale

advantages in certain crops, combined with high transaction costs faced by private farmers seeking to organize medium- or large-scale production, limit the gains to households from shifting resources into private production. But even where high transaction costs do not lower returns to private farming, informal social norms may also raise the costs of adopting private farming, thus slowing its expansion. This framework suggests that the evolution of private farming is likely to be slow in regions where the dominant crops exhibit important economies of scale, where the transaction costs of organizing medium- or large-scale private farms are high, and where social norms mitigate against the adoption of private production. In regions where small-scale production is competitive, where private farmers do not face disproportionate transaction costs, where social norms are supportive of private organization, and where cooperatives

An Analytical Framework 27 fail to adopt efficient governance structures, private farming is expected to emerge more quickly. In the chapters that follow, I will test this theoretical framework by looking at regional (province-level) data from Hungary and Bulgaria. The regional data allow us to examine the relationship between the persistence of collective farming and proxies for product type, market development, and social norms. The extent to which the theoretical framework succeeds in explaining the slow and uneven pattern of development of private farming implies that co-

operative farming persists because it increases the returns that rural households receive on their assets or reduces social costs involved in farming. That is, given the current economic and social context in parts of East Central Europe, cooperative farming offers a rational means of allocating household resources. This does not imply, however, that returns to households and agricultural efficiency could not be increased through economic policy. By limiting the entry of competitors, the transaction costs that reduce the

appeal of private farming may also allow existing cooperatives to pay landowners less than the full value of their land and to avoid efficient adjustments in production and organization. Policies that promote the expansion of markets in land and other agricultural inputs and products may raise returns to landholders and to agriculture overall. Thus, while the commodification of land has often been condemned as a cause of rural inequality and poverty, land markets may play a more complex role in rural development. Increased inequality is certainly one possible outcome of the expansion of land markets, but it is not the only possible one. At the same time, this study of the agricultural changes under way in East Central Europe suggests that a lack of market development may also contribute to rural poverty and inequality. Continued development of markets for land, credit, and agricultural products may facilitate the entry of new private and cooperative farmers and place pressure on existing cooperative farms to improve returns to members through improved efficiency and payments for land.

Decollectivization in Bulgaria Introduction The decollectivization of Bulgarian agriculture has been particularly slow, even by East Central European standards. In 1994, only 16 percent of arable land had

been returned to private ownership in defined boundaries. By July 1996, the share had reached only 18 percent, and the share held with titles had reached only 6 percent (OECD 1997, 115). Even when private property is restored, it seems that much of the agricultural land is likely to remain under collective forms of production. Fifty-four percent of rural Bulgarian households surveyed in 1994 had placed or planned to place their newly restituted land in production cooperatives (BSD 1994). In early 1996, 44 percent of Bulgarian arable land, including land already restituted to private owners, remained in cooperatives (ABBC 1996, 1). Rural dwellers organized actively to defend such collective forms of agriculture against a government-led breakup, even resorting to violence in some cases (Kaneff 1997, 90; Creed 1995; Begg and Meurs 1998). The reluctance of Bulgarian households to begin private farming has often been dismissed as irrational, ideologically motivated behavior on the part of the relatively procommunist rural population still under the sway of former village leaders. Theoretical perspectives outlined in chapter 2 suggest that such

social norms and expectations may indeed play an important role in households’ decisions. However, the literature also suggests an alternative explanation for households’ hesitation to engage in private farming. Economic factors may also play an important role in households’ decisions to keep their land in production cooperatives, despite the widespread incentive problems that have been associated with collective production in recent Bulgarian history. In particular, the transaction costs involved in forming a viable private farm are likely to be high in many areas. The specific policies of Bulgarian agri-

cultural reform have greatly fragmented agricultural assets, and the markets needed to recombine agricultural assets are weakly developed. Market development was very limited in Bulgarian agriculture prior to the experiment with central planning and did not expand under central planning. Instead, Bulgarian agriculture has long been organized along collectivist principles. Just prior to World War IJ, most households farmed small, subsistence plots that they owned. They worked these mainly with their own labor and few other inputs. Credit and marketing, if used at all in agriculture, were usually organized 28

Decollectivization in Bulgaria 29 through small, state-supported cooperatives that incorporated the majority of the rural population (Spreeuw and Stoyanova 1997). Alongside private landholdings, in most villages a part of agricultural land was still held as common property, and these meadows and forests were often worked collectively (Begg and Meurs 1998). During the state socialist period, Bulgarian agriculture was among the most highly collectivized and state controlled in East Central Europe. Even for the small plots that households continued to farm individually, markets played almost no role in determining production, providing inputs, or distributing output (Dobreva and Meurs 1992). This history has contributed to weak development of agricultural and rural markets in the post-1989 period. In addition, the specific history of Bulgarian agriculture has also created sets of social and political norms that may favor collective over private forms of rural organization. These norms vary not only across countries but also across regions within each country. In this chapter, I use survey data collected by our research team’ in Bulgaria during the summers of 1992 and 1994 to provide an overview of the reform process and the development of agricultural markets and private farming. Combining the survey data with historical data on political and social norms and regional cropping patterns, | test two simple models of household choice of organizational form after 1989. The models suggest that, while social norms do play a role in households’ decisions about organizational form, the vulnerability of private farmers to high transaction costs plays a bigger and more persistent role. Differences in the costs of organizing a private farm thus help to explain differences in the pace of decollectivization across Bulgaria. The choice of a household to place land in a cooperative after restitution may offer the best return on its land, given the household’s particular set of resources, the level of local market development, and traditional crop specialization in that region. Even when cooperatives are chosen by households as a means of improving returns on land, however, many cooperatives appear to be continuing organizational practices from the pre-1989 period that limit effective governance and hurt performance. Government policies to reduce the transaction costs faced by private farmers could thus play an important role in improving agricultural performance overall. And whereas it is sometimes argued that market expansion worsens rural income distribution, in this case market development may serve to increase the earnings of poorly endowed smallholders.

Bulgarian Background As suggested in chapter 2, history, geography, and the nature of current reforms are all likely to influence the relative benefits of private and cooperative

30 The Evolution of Agrarian Institutions farming in Bulgaria. What follows is a brief overview of these historical and current contextual factors.

Prewar Background The prewar legacy of Bulgarian agriculture is one of extremely small-scale, low technology farming. In 1946, 69 percent of all landholdings were under 5 ha. Another 36 percent of holdings were between 5-30 ha, while both landlessness and large landholdings were rare. Average plot size was further reduced by the

fact that households’ land was not consolidated but rather scattered around the village, with each family holding an average of seventeen tiny units. The small and fragmented holdings greatly complicated the implementation of irrigation, crop rotation, and mechanization. In 1944, there were only 4,500 tractors in Bulgaria, concentrated on the largest farms. Most villagers continued to use either a traditional wooden plow or a steel plow drawn by live horsepower (Meurs, Kouzhouharova, and Stoyanova 1999). In this smallholder economy, the development of agricultural markets was

limited. While land was sometimes bought, sold, and rented and labor was hired, households mainly farmed their own land with their own labor. Richer households farmed their own land and perhaps a bit more with the help of some occasional hired labor, while poorer households farmed their own small plots and sometimes hired out surplus family labor to supplement household income. But such hiring of land and labor was not common. In our 1992 survey, only 5 percent of households recalled that the family had hired labor in before the war, while another 13 percent recalled hiring labor out. Only 1 percent recalled hiring in land, while another 1 percent hired land out (BSD 1992).

While some farmers practiced intensive farming for urban markets (Lampe 1986, 56), most focused on subsistence. In addition to other problems, prospective commercial producers faced highly monopolized output markets.

Beginning in the 1930s, the state formed a purchasing monopoly in grains, sugar beets, cotton, tobacco, and other products. Delivery quotas were established at low, state-determined prices, and these requisitions were later continued during the German occupation (Lampe 1986, 82). There was thus little incentive to engage in private, commercial production in the prewar period. Nonetheless, the state depended on agriculture for badly needed export earnings and export tax revenues (Spreeuw 1998, 25). To promote agricultural

modernization, rural cooperatives were supported by political parties from both sides of the political spectrum in the early 1900s and were funded through state-run banks. While these cooperatives were initially resisted by villagers (Yanchulev 1938, 11), they became a central plank of the program of the peasant-populist Bulgarian Agrarian National Union (BANU) by the end of the

Decollectivization in Bulgaria 31 1910s and as such enjoyed broad peasant support. BANU leader Alexander Stamboltiski was asked to form a government in 1919, after BANU won 22 per-

cent of the votes in the national election (Crampton 1987, 83). Stamboliiski supported a program of agricultural development that organized smallholders into cooperatives on the German Raiffeisen model (Lampe 1986, 29-30). Even after Stamboliiski’s murder by right-wing forces in the coup of 1923,

other political parties continued to promote cooperative organizations in the countryside. By 1939, 3,500 cooperatives with nearly one million members (both individuals and groups) incorporated about one-third of the economically active population in the country. The most widespread form of cooperative was the credit cooperative—in 1944, these accounted for 76 percent of all rural cooperatives. Many of these cooperatives sold villagers industrial goods and served as purchasing (collection) points for agricultural production. Some cooperatives also processed the agricultural goods—especially tobacco, wine, milk, sugar beets, and fruits and vegetables—allowing peasants to capture part of the profits from the sale of the final products (Stoyanova 1993). From the turn of the century onward, agricultural production cooperatives were also organized in Bulgaria, although these were a less important form of cooperative. Production cooperatives gained popularity in the 1930s, and from 1935 until 1944 an estimated sixty-six production cooperatives were organized, with just under 3,000 members farming about 8,000 ha of land (Siylemezov 1975, 32; Mateev 1967, 179-93). Cooperatives thus have a long prewar history in Bulgaria, offering villagers a means of increasing their access to capital and boosting their incomes over what they could achieve individually. Prior to collectivization, Bulgarian farmers had little experience with large-scale or commercial production.

Agriculture under Collectivization Collectivization both broadened and significantly changed the rural population’s experience with collective production, bringing it much more tightly under state control. Two other substantial changes took place under socialist agriculture that are particularly important in understanding households’ responses to the current reform: changes in the form of private farming and changes in agricultural technology. Under collectivization, the scope of private farming was greatly reduced. Private ownership of agricultural land was usually limited to the yards surrounding private homes, private ownership of agricultural machines was largely prohibited, and distribution of nearly all inputs and most of production were controlled by state institutions. Despite these limits, widespread private agricultural production per-

32 The Evolution of Agrarian Institutions sisted in Bulgaria through 1989. A small amount of land in mountainous areas was never collectivized (about 5 percent of arable land); on this land, smallscale, private agricultural production (mainly of livestock) persisted more or less intact. In mountainous areas, too, collectivization of production processes on “collectivized” land was often limited by the uneven terrain and difficulties

in mechanization. Many households continued to farm their traditional land individually, producing labor-intensive crops. However, these households were brought under relatively strict guidance by collective farm directors, who also controlled the final products.

A more widespread form of private farming occurred on “personal plots, averaging 0.3 ha in 1986 (Dobreva and Meurs 1992).? Nearly all members of cooperative farms had access to such plots, and after 1974 other interested rural dwellers could also receive plots (SN 1974, 18). Personal plots were used mainly to produce food for household consumption. But households also used the plots to produce some products for sale to the state and, to a lesser extent, to local peasant markets. Although these plots were formally under the control of the households, the state exercised significant influence over their use. Collective farms (TKZSs) often planted and even harvested the crops in the name of the individual households, simply delivering a share of the production to households at year-end.

The inputs households needed for household plot production were traded with neighbors or received (officially or unofficially) from the collective farm. Markets for agricultural inputs were extremely limited under central planning. The purchase of agricultural land or machinery by private parties was prohibited, and inputs and utensils for private farming were sold in very limited amounts exclusively by the state. Private production thus took a dependent form, offering little opportunity for household initiative in organizing or carrying out production.

Beginning in the mid-1970s, the Bulgarian government began to encourage a limited expansion of both household production and agricultural markets. Households were encouraged to produce fresh fruit, vegetables, and animal products—fragile and labor-intensive products that fared poorly on state farms—to help the state satisfy increasing consumer demand for these products. Provisions were introduced to facilitate sales of this production in unregulated cooperative markets (SN 1970, 26; SN 1971, 5). In addition, the Bulgarian Peoples’ Bank was encouraged to extend loans to small producers for the construction and repair of private agricultural buildings. New state shops were to open to sell seeds and farm inventories directly to private producers and to rent agricultural machines. Even the ownership of small-scale agricultural machinery was once again permitted. Despite the changing legal conditions, the actual development of these markets was very limited. Few

Decollectivization in Bulgaria 33 stores opened, even fewer loans were granted, and only about 6 percent of rural households made sales of output on “cooperative markets” in 1986 (Institute of Sociology 1986). Instead, the majority of household production was consumed by households or sold to the state at fixed prices in exchange for inputs. Beginning in 1982, an accord system was also introduced. This system was meant to improve incentives for workers on collective farm land through quasi privatization. Part of collective farm work was subcontracted to groups of workers, families, and later to individuals, who were encouraged to rent machinery and land from the collective farm for a fixed period of time (usually one or two years) and to contract with the farm for the supply of other inputs. Sometimes these groups would contract to fulfill a specific task, such as weeding a given area, but increasingly the contracts were for final production, making the groups residual claimants. Twenty percent of agricultural workers were organized into family-based accords by 1988. In these cases, rural households increasingly took control of the complete production processes but were still under close guidance of collective farm managers, who often dictated product choice, technology, and input mix; provided inputs; and collected outputs (Meurs and Djankov 1998). Most households thus have uninterrupted experience with private production from the prewar period through central planning. But during this period, the experience was mainly with small-scale production for subsistence use or sale to the state. Market use by private producers was very limited. Under central planning, both household productive autonomy and market use decreased significantly, even considering the reforms of the 1980s, such that by 1989 households had little experience with either.

Alongside changes in household production, collectivization also brought important changes in the technology and scale of production in agriculture. After collectivization, farms were gradually consolidated into extremely large, highly mechanized units, averaging 2,358 ha and 367 workers in 1988. From the 4,500 tractors available in 1944, the number rose to 61,720 by 1965 and more than doubled again by 1985, reaching 146,470 (BNIS various years). Available combines increased similarly. This process of mechanization fundamentally changed the way that grains and certain other crops (such as sugar beets and sunflowers) were grown in Bulgaria, resulting in an almost entirely mechanized production process. Under these conditions, large farms were able to realize significant economies of scale, which were central to Bulgaria’s ability to competitively export grain to international markets (World Bank/EC-PHARE 1993, 21). The use of specialized agricultural machinery grew much more slowly under central planning, however, and production of certain other crops, such

34 The Evolution of Agrarian Institutions as tobacco or vegetables, remained very labor intensive. Economies of scale were thus not important in these crops, and household production was often more cost effective than collective production. Recognition of this situation

underlay the shift of much of the production of labor-intensive crops to household plots or subcontracting arrangements (accords) in the 1980s. From 1983 to1989, for example, private households produced an average of 51 percent of eggs, 46 percent of green peppers, and 34 percent of tomatoes (BNIS various years).

Collectivization thus resulted in significant, but uneven, increases in mechanization. In the early 1990s, the suitability of existing technology and production experience to small-scale production differed greatly by crop, and

this contributed to differences in the viability of private and cooperative farming.

Bulgarian Agricultural Geography Prior to World War II, Bulgaria remained a highly agrarian society. In 1934, 69

percent of the population continued to work in agriculture, forestry, or fishing. Cereals remained the most important crop, accounting for 67 percent of arable land and 13 percent of exports (Crampton 1987, 138-42). By 1989, significant industrialization had taken place, of course, but agriculture, and especially grains, remained central to the Bulgarian economy. Twenty-one per-

cent of the labor force worked in agriculture in 1987, and agriculture accounted for 16 percent of exports (BNIS 1988b, 112; Vienna Institute 1991). Grains continued to cover 56 percent of arable land. Industrial crops—in-

cluding both those under large-scale mechanized production, such as sunflowers, and those under small-scale, labor-intensive production, such as tobacco—accounted for another 12 percent of arable land, while vegetable production accounted for 5 percent. Pastures made up about one-quarter of all agricultural land (BNIS various years). The physical geography of Bulgaria includes both sweeping plains and mountainous regions, and agricultural production varies with the geography. Above the Stara Planina mountain range, which bisects the country from east to west, the share of arable land planted in grain or mechanized industrial crops reaches 60 or even 70 percent in some provinces. To the south of the Stara Planina is an area blessed with rich soils and proximity to two of Bulgaria’s largest cities. There agriculture has historically specialized to a greater extent in veg-

etable, fruit, and tobacco farming. In the mountainous Rhodope region of southeastern Bulgaria, tobacco, vineyards, and fruit have predominated, while the mountainous regions of southwestern Bulgaria and the Stara Planina have specialized to a greater extent in pasturing livestock (Keefe et al. 1974). These

Decollectivization in Bulgaria 35 different specializations have historically influenced the forms of agricultural organization and appear likely to do so in the current period (see fig. 3.1). The organizational form chosen by households may also be influenced by demographic factors. Thirty-four percent of the Bulgarian population continued to live in rural areas in 1987, but much of this population was beyond prime working age. Forty-two percent of rural dwellers were over fifty years old. Among the full-time agricultural labor force, only 43 percent were under fifty years old in 1987 (BNIS 1988b, 38, 120). The agricultural labor force was also poorly educated, with only slightly over 1 percent having completed postsecondary education and 86 percent having completed only primary school or less in 1985 (NIS 1988, 424). These factors limit the potential of rural households to develop private farming.

Current Reforms Economic reform in Bulgaria has proceeded exceedingly slowly. From 1989 until the elections of November 1991, Bulgaria was governed by a coalition led by a Communist Party reformer. Seats in the Grand National Assembly, elected to write a new constitution and pass basic reform laws, were divided among

more than a dozen parties, leaving the body dominated by two powerful blocs—the reform Communists (now called the Bulgarian Socialist Party, or BSP) and the opposition coalition, the Union of Democratic Forces, or UDF. The resultant stalemate prevented effective reform. In a fundamental political shift, the parliamentary elections of October 1991 gave a majority to the UDF, and reform began to proceed a bit more quickly. A privatization law was passed in 1992, but, even so, few (30 of over 5,000) state firms had been privatized as of late 1994. The demonopolization law, which mandated the breakup of large state firms, often created regional monopolies in the place of national ones. As late as 1997, much of the economy continued to be dominated by state-owned monopolies Those aspects of restructuring that progressed more quickly have generally not created favorable conditions for agriculture. State firms and collective farms lost both government subsidies as a result of economic liberalization and export markets as a result of regional recession and trade realignment. From 1989 to 1994 national production fell by about one-half. As wages fell with production, the government used trade regulations to further limit agricultural exports and keep food prices down (OECD 1997, 144). At the same time, prices of goods with high import content (such as fuel, fertilizer, and machines) adjusted quickly to world levels. Agricultural producers were caught in the “price scissors,” with the agricultural producer price index increasing by a factor of nine from 1990 to 1994, while the input price index grew to twenty-

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Decollectivization in Bulgaria 37 three times its previous level. Stabilization policy perpetuated high nominal interest rates, while inflation (100 percent during 1994) encouraged shortterm lending and effectively cut off credit to agriculture. At least partly as a result of this squeeze, agricultural production fell to 84 percent of the 1989 levels by 1993 (WIIW Databank 1995). With profit margins squeezed, agricultural producers could ill afford to experiment with organizational forms that might raise transaction costs or increase risk. The Land Law The Ownership and Use of Farm Land Act passed in early 1991 mandated the restitution of land to its previous (1944) owners or their heirs. Rights of new owners were initially quite restricted, however, and the law was amended by the UDF government in April 1992. Under this version of the law, all collectively held land was to be returned to its original owners in its original boundaries, with two exceptions. Land equivalent in size and quality might be given

in order to consolidate a household’s landholdings to avoid re-creating the scattered plot system of the prewar period or to make up for where the original plot no longer existed due to road building, irrigation projects, or other development. Land received through restitution may be freely bought and sold, although land may not be purchased by foreign citizens, and for two years following the reform land could not be acquired in excess of 30 ha per family, except through inheritance. Landless persons and those with very small holdings are eligible to buy land from national and municipal land reserves.” The old collective farms were technically eliminated under this process of

restituting all land, and the central government appointed liquidation commissions to distribute collective farm property. All those who contributed labor or assets to the farms at or since their formation were eligible to receive a share of the property. The method of distribution varied greatly across time and place, however. Early distributions often involved livestock, which the restructuring farms were unable to feed during the difficult winters of 1992 and 1993. Livestock were sometimes distributed to individual households eligible to receive property, and as a result young professionals living in the capital city suddenly became the owners of a cow or two. More often, the animals were slaughtered and the funds used to pay off farm debt. Some assets, especially tractors and other mobile and valuable assets, were sold to individuals. More commonly, however, fire sale auctions were held. In these auctions, it became

common practice for members of the former collective farm to pool their share coupons and purchase large and fixed assets (such as farm buildings or grain dryers) as a group. Such common purchases were often organized by vil-

38 The Evolution of Agrarian Institutions lage leaders, with the intention of making them the basis of a new cooperative (Begg and Meurs 1998; Creed 1997; Kaneff 1997). The legal possibilities of organizing new agricultural production cooperatives varied over the period 1991-94. An early law that would have permitted the old collective farms to be directly transformed into shareholding cooperatives by vote of the membership was overturned in 1992. Under the UDF-led government, new cooperatives could be legally registered only if they were formed by newly titled landholders after the complete liquidation of the TKZS. This prevented the legal formation of new cooperatives in many places, since practically no landholders had received title to their land in 1992. Still, many

new de facto cooperatives were organized in contravention of the law. On farms where members or management hoped to organize a new cooperative, they often pressed land and liquidation commissions to drag their feet, leaving the old collective intact as long as possible. When the UDF law was relaxed in 1993, many of the old TKZSs were quickly organized into new cooperatives (Begg and Meurs 1998). Whereas the process of restitution fragmented agri-

cultural assets, the organization of these new cooperatives permitted the reunification of the fragments and facilitated their productive use.

Overview of Emerging Forms of Production Except where noted, the data discussed below come from the Bulgarian Decollectivization Survey, which was implemented in August 1992 and again in October 1994. The survey used a stratified sample of 600 rural households in 100 villages that was drawn from a much larger, nationally representative sample of households interviewed in the national Town and Village Survey in 1986.4 Unfortunately, the original household lists were missing for four of Bulgaria’s twenty-eight okrugs,” and as a result our survey is representative of twentyfour of the twenty-eight okrugs. We believe, however, that we have achieved good coverage of the range of agricultural regions in Bulgaria (by altitude and slope as well as by crop type) and that our results represent quite well the dynamics of the country as a whole. The household sample excludes urban dwellers, many of whom had received or would receive land in the restitution. Few of these households are

likely to return to farming, even as unemployment rises (Creed 1995), and these households will find greater difficulty in coordinating private rental arrangements from the city. They are therefore more likely than rural households to place their land in cooperatives. Their exclusion from the sample should understate, if anything, the importance of cooperatives and will help to highlight the local factors that influence the viability of private farming.

Decollectivization in Bulgaria 39 In addition to surveying households, Bulgarian interviewers also gathered data on the general progress of agrarian reform at the village level—in village land commissions, mayors’ offices, liquidation commissions, and from other village officials. In 1994, the interviewers also collected data from the newly formed agricultural production cooperatives found in sixty-seven of the sample villages. Data on household production from the 1992 survey refer to 1991, since that was the most recent completed production cycle. Other questions in that survey, including all questions asked of village officials about the reform process, refer to 1992. The dates cited in the text reflect this distinction. The 1994 data refer to 1994 production, since the agricultural cycle was largely completed at the time of the survey.

Overview of the Restitution Process At the village level, the process of collective farm liquidation and land restitution began extremely slowly. By August 1992, the TKZSs in only eleven of the

ninety-nine responding villages had had their assets liquidated. In twentythree of the ninety-nine villages, no land whatsoever had been distributed, while in fifty-one, small plots had been distributed for temporary use only. Most land (82 percent of arable land) was being farmed under the old TKZS structure, sometimes by old managers and sometimes by the newly appointed liquidation commissions, which managed the old collective farms up until the point of liquidation. The process was uneven, however. Four villages in two okrugs reported that all nonland assets of the TKZSs had been liquidated by the commissions. In thirteen villages, between 50 and 100 percent of the land had been distributed. The speed of land distribution reflected some clear regional patterns, with land in the vegetable-, livestock-, and tobacco-producing regions of southern and central Bulgaria being distributed much more quickly than land in the northern grain-growing regions. Despite the initial slow pace of the land and legal reform and the continued predominance of the old collective farms, villagers were already taking up private farming and forming new agricultural cooperatives by 1992. About half of the ninety-nine villages reported that some villagers were engaged in private agricultural production as their main occupation. Some of these were new commercial farmers, but pensioners farming garden plots similar to their old, socialist personal plots and having no other occupation were also included in this category. Overall, mayors reported that private individuals farmed 10 percent of agricultural land, about what they had farmed under central planning. Still, these private farmers presumably now had more freedom in managing and expanding their enterprises than they would have had under cen-

tral planning. Twenty-eight villages reported new, registered agricultural

40 The Evolution of Agrarian Institutions cooperatives. An additional seven villages reported the existence of informal (unregistered) agricultural production associations. Twenty-five of the total thirty-five cooperatives were reportedly functioning. While this situation remained largely unchanged at the end of 1993 (Ministry of Agriculture 1993), significant changes were visible by the end of 1994. Only six of the ninety-nine villages reported that no land had been distributed, while fifty-five villages had distributed all land, and the share of land farmed by private farmers had almost doubled, to 19 percent. The majority of land was still held only on the basis of temporary-use permits, however. Sixtythree villages reported that no land had been distributed with legal titles, and without titles land cannot be sold or used as collateral. By 1994, the earlier regional patterns in land distribution had disappeared. In fact, villages in the southern and central regions had fallen slightly behind villages in the northern grain-growing okrugs in land distribution. The formation of new agricultural production cooperatives (ZPKs) also continued between 1992 and 1994, and by 1994, sixty-seven out of the ninetynine villages contained at least one registered ZPK. Of the eighty registered ZPKs in our survey, seventy-four were operating during 1994. Twenty-four villages also reported informal cooperatives. Land worked under the direction of the liquidation committees (still unliquidated TKZSs) only accounted for 25 percent of arable land in 1994, while the new cooperatives farmed 47 percent of village arable land. Despite the disappearance of patterns in the degree of land distribution, clear regional patterns were visible in the emerging forms of agricultural organization. The share of land farmed privately is most significant and had grown fastest in the mountainous and semimountainous regions in southern and central Bulgaria. This pattern was already visible in 1992, when, as noted earlier, these areas decollectivized most quickly. But by 1994, when most of the land had been returned to private owners throughout the country, the emergence of private farming was even more strongly concentrated in the southern and central regions.

Emerging Producers and Their Market Contexts Private Farming The new private landholders were initially not well equipped to begin private farming. They could expect to hold only small amounts of land after the restitution was completed. In 1994, sample households expecting land (81 percent of the sample) expected to own an average of 3.4 ha. Rural households owned only a small number of agricultural machines, although significant increases in machinery ownership could be seen compared to 1992. In 1994, only 6 per-

Decollectivization in Bulgaria 41 cent of households owned a tractor (up from 3 percent in 1992) and 27 percent owned a plow (up from 12 percent). Some households could provide minimal traction using draft animals: 17 percent owned a horse (up from 11 percent), while about one-quarter owned a donkey. Rural households also had few prime-age workers available to engage in private farming. Almost half (42 percent) of survey households had no member under age fifty-five in 1994. On average, households had 1.2 workers between the ages of twenty-five and fifty-five and a total size of three members. Still, some labor was available for farming. In addition to the many pensioners, another 15 percent of villagers were not employed at the time of the 1994 survey, and near future employment options appeared limited in many rural areas. Nearly all rural residents had some experience with private agriculture (only sixteen households in our sample had farmed no land in 1991, the year before restitution began), although, as noted earlier, the experience was generally with very small-scale production. The majority of households (67 percent) cultivated under 0.5 ha in 1991, while only two households cultivated plots of 1 to 5 ha. Perhaps as a result of the limited resources of many households, in 1994 households farmed less land than they owned—an average of 1 ha. Only 2 percent of households farmed over 50 ha. Land not farmed by the owner might be left fallow, rented to a new private farmer, or incorporated into a cooperative. Most households used their small plot mainly to fulfill household needs or the needs of extended family members in nearby urban areas. The majority (57 percent) reportedly did not earn an income from farming, and only 4 percent of households described agriculture as their sole source of monetary income. Few private farmers aspired to expand their tiny plots into full-time or commercial farms. Fifty-four percent of households surveyed in 1994 planned to put at least part of their land in a cooperative after the completion of restitution (up from 46 percent in 1992), while another 9 percent expected to farm it in a smaller partnership with friends, and three-quarters of households reported that they had no plans to expand their landholding. Still, most villagers (77 percent) did expect to continue to work on private plots for household consumption. As part of this strategy of meeting household needs, most private farmers did not specialize in a particular product but cultivated a wide variety of crops, including tomatoes, peppers, onions, potatoes, beans, fruit, and cabbage, as well as corn or oats for the sheep, fowl, and pigs, which most households kept. In 1994, 34 percent of households reported having no dominant crop. If a household did report a specialization, it was most often in vegetables (30 percent of households), followed by potatoes (9 percent) and fodder (8

percent). Such subsistence-style farming has historical precedent in the

42 The Evolution of Agrarian Institutions Balkans, and during the upheavals of the last century it has often enabled ru-

ral landholders to live more comfortably than urban dwellers. Culturally, farming has not been seen as a commercial endeavor so much as an aspect of household reproduction.

While most private producers are smallholders producing mainly for household consumption, there are significant regional differences in assets and behavior. In the northeastern okrug of Vidin, for example, households held an average of 6.2 ha in 1994, and no households reported holding below the national average of 2.3 ha. In the mountainous southern okrug of Smolen, on the other hand, households reported an average holding of 0.4 ha and 60 percent of households reported holding below the national average. Surprisingly, however, a national comparison of landholding sizes in mountainous and plains counties does not show a clear pattern of difference. Households’ capitalization also differed greatly by region: most households in the southeastern okrugs owned no tractors, while in some central regions approximately one-quarter of households owned tractors. These differences are linked to the speed and form of liquidation of the TKZSs as well as to the traditional crop specialization and initial level of capitalization in the region. Again, no clear distinction can be drawn between dynamics in the plains and mountainous regions. Households reporting a crop specialization were concentrated, with a few exceptions, in the vegetable-growing regions of south-central Bulgaria.© Less household specialization occurred in the grain-growing okrugs of northern and eastern Bulgaria, where high percentages of households planned to place land in cooperatives, keeping only enough land for subsistence production. The impact of these regional differences on rates of decollectivization is explored further in the models that follow. These private producers farm in a context of extremely weakly developed markets. While significant evolution of agricultural markets can be seen between 1991 and 1994, in 1994 it was still unusual for households to use markets to adjust their access to land, labor, or capital.’ Land and labor markets were particularly poorly developed: in the 1992 survey, all households that acquired new land for the 1991 production cycle received it from the TKZS for temporary use, under the land law. No households reported renting land to other households, and only 3 percent rented to agricultural cooperatives. In 1994, 4 percent of households rented out land, and the majority of these rented to individual farmers. Another 3 percent rented in land, also mainly from private households. Households expected this trend to continue upward, with 7 percent of households planning to rent land out in 1995. No sales of land were yet legal in 1994, due to restrictions in the land law, but 3 percent of households planned to sell their land in 1995, while another 2 percent of households

Decollectivization in Bulgaria 43 planned to buy land (table 3.1). Land markets are unlikely to develop more rapidly in the near future, however. A study by the Organization for Economic Cooperation and Development (OECD) emphasizes that small plot sizes, low agricultural prices, and high transaction costs all contributed to the weak development of land markets and are likely to continue to do so (1997, 116). The majority of private farm labor was supplied by the household itself. Only one household reported hiring a paid laborer in 1991, while 8 percent enlisted the services of relatives, often in exchange for other labor or agricultural products. By 1994, significant development of labor markets could be seen. Still, only 9 percent of households hired manual labor for work on their private land (table 3.1). Reliance on capital markets was also extremely limited. In 1991, only three households reported borrowing for agricultural purposes. In 1994, four households borrowed money for agriculture (table 3.1). Working capital for private agriculture instead came mainly from nonfarm incomes (92 percent of surveyed households). Private farmers’ access to credit was limited by a number of factors. The system of credit cooperatives that existed before 1946 had not yet reemerged: in 1994, only two villages reported having a credit cooperative. Most state and commercial banks were unwilling to make new loans to agriculture, which offered returns much lower than those in commerce and services. Even if farmers could find a willing lender, few had legal title to their land that would allow them to use it as collateral (World Bank/EC-PHARE 1993, 39-40). Perhaps the best-developed markets were those for machine services. Given the limited supply of machinery, many households hired machine services for their small-scale production, and these markets became increasingly diversified between 1991 and 1994. About half of private producers hired machine services in 1991 and 1994 (table 3.1). In 1991, producers had almost no choice of input supplier. The great majority obtained the services from the TKZSs, continuing a practice from before 1989. By 1994,

only 36 percent obtained their machine services from the liquidation commission and 15 percent from a state firm (table 3.2). As private individuals bought tractors, they became an important source of such services, supplying TABLE 3.1. Development of Agricultural Input Markets in Bulgaria, 1991-94 (percentage of households buying, selling, or renting)

Land Labor 30 79

Input 199] 1994

Credit 0 0

Machine services 50 45

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Decollectivization in Bulgaria 45 one-third of households that hired this service. Despite the increasing diversity of suppliers, the majority of households faced a local monopoly, reporting only one possible supplier for machines and machine services. Sources of several other inputs were similarly concentrated. Although many households did not purchase inputs in 1991 (due either to the small scale of their farming or to their close connections with existing TKZSs), most of those who did bought their seeds and chemicals from (highly concentrated) state firms, while most fertilizers and fodder were bought from TKZSs (a local monopoly). By 1994, the dominance of state firms in input markets had been reduced. Of the households that reported purchasing seeds, pesticides, machines, and spare parts, about half bought from state firms. Private firms had developed the strongest presence in pesticide markets, where they supplied one-quarter of purchasing households. Private individuals had also become important suppliers of certain products, including livestock (supplying

82 percent of purchasing households) and seedlings (67 percent of households). New nonagricultural cooperatives supplied nearly one-quarter of households with fertilizer (table 3.2). These markets, too, diversified while remaining highly concentrated. Buyers reported the most choice of sellers in seed markets (39 percent of households could choose from among at least three sellers). Chemical markets remained more concentrated, with only 13 percent of households reporting a choice of three sellers. Considering all input purchases, the majority of private households reported a choice of only one input supplier. Some output markets transformed more rapidly. By 1991, the predominance of state firms and TKZSs appeared to have already eroded in many areas. Vegetables, for example, were most often marketed directly to the population (51 percent of producer households marketed to consumers in 1991 as

open-air markets expanded). Vegetable-producing households apparently also had a choice of other marketing channels, including state and cooperative firms.

Although significant monopsony power still existed for some other products in 1991, including livestock and grains, by 1994 even these markets appeared to be becoming more diversified. Only 46 percent of those households selling milk sold to state firms, while 41 percent sold to private firms. Thirtytwo percent of households sold their wheat to a state firm, while 47 percent sold to a private individual (table 3.2). Wheat markets appear especially competitive: 69 percent of households selling wheat reported having a choice of at least three buyers. The market for milk remained highly concentrated, however, with 62 percent of households reporting only one outlet. Tobacco growers fared the worst, with 100 percent of sellers reporting only one buyer, most often the regional branch of the old state tobacco monopoly, Bulgartabac.

46 The Evolution of Agrarian Institutions The survey offers a picture of small-scale, low-input private farms, often squeezed by local agricultural monopolies, that offered little return on their owners’ time and assets. Almost one-quarter of private agricultural producers reported that expenses were not covered by production, while another onethird of producers said that they were just barely breaking even. Agricultural Production Cooperatives As noted, new production cooperatives began emerging during the earliest period of the transition. At the time of the 1992 survey, the category “coopera-

tive” included two very different types of organization. A number of the old TKZSs had used a 1991 law to transform themselves directly into a new legal form of “cooperative,” Agricultural Production Cooperatives (ZPKs). These farms were essentially identical to the old TKZSs—very large and highly mechanized farms, run in a top-down manner, often by the same manager who had run the farm before 1989. Fifty-seven percent of cooperative members surveyed in 1992 described their cooperative as “basically the same as the old TKZS.” After 1991, these farms did generally offer some new membership rights, such as the receipt of rent for land, often paid in kind. Forty-three percent of cooperative members interviewed in 1992 reported belonging to more innovative forms of organization, however. These new cooperatives were quite different from the old collective farms. They were smaller, farming only an average of 356 ha, with eighty-seven members, and often consisted of a small group of old friends or related families. By 1994, the situation had changed. The 1991 law had been overturned, and all former TKZSs were in the process of liquidation (or had already been liquidated). The majority of new cooperatives were independent units based on the voluntary membership of holders of newly restituted land (although most did not yet hold title to this land). This change did not lead to a proliferation of small units, however. In 1995, 73 percent of 255 villages surveyed in

a study by the U.S. Agency for International Development (USAID)-funded American-Bulgarian Business Center (ABBC 1996, G-1) had only one cooperative, while another 24 percent had two. The average size of new cooperatives in our 1994 survey was 692 ha and 418 members—much smaller than the original TKZSs but still quite large. In many villages, the cooperative was still managed by someone connected to the original TKZS, often in a topdown manner reminiscent of the pre-1989 period. According to the survey, members did not play an active role in managing these new cooperatives or in monitoring the management: in 1995 only 42 percent of surveyed members reported attending the meeting of the General Assembly and only | percent of cooperatives underwent a change of management due to a decision of the General Assembly (ABBC 1996, 18).

Decollectivization in Bulgaria 47 Still, some smaller, more diverse forms of cooperatives also continued to emerge. One set of case studies (Kaneff 1997) contrasts a large cooperative (1540 ha and 474 members) under old-style management with a quite different type of cooperative—a small farm (250 ha and 50 members) run by young entrepreneurs. This new-style cooperative, too, is run without member control or input. The entrepreneurs pay a low, flat rent to landholder “members” but otherwise manage the farm as they see fit, keeping any profits for themselves. In other places, a “cooperative” may imply a small group of landholders who join together simply to buy and use a few machines but run what are essentially family farms, or it may imply a group that performs some labor together but one in which individuals keep only the production from their own land (Meurs 1993b, 1994). The legal framework is flexible enough to allow a wide range of forms of organization to be registered as “cooperatives, and experimentation is likely to continue as landholders and entrepreneurs seek viable means of using local assets. Nonetheless, for the moment, the large, highly

mechanized, only partially transformed version of the TKZS remains the dominant form of cooperative organization. In general, the Bulgarian cooperatives serve as a means of pooling land, not labor. Few member households in our survey expected someone to work in the cooperative: in 1994, only 3 percent of surveyed households expected

a member to work in the cooperative full time, while 8 percent expected someone to work part time. This is a significant change from initial expectations. In 1992, 23 percent of households expected someone to work in the cooperatives. Most members received rent on the land they incorporated into the cooperatives, and the size of the rental payment was usually linked to the final output of the cooperative, potentially providing an incentive for members to intervene actively in cooperative management. Only 11 percent of surveyed cooperatives did not pay rent in 1994. Most rental payments were small, however, and the vast majority were paid in kind, especially in fodder and grains, which could be fed to livestock that members were raising for household consumption. About half of the new cooperatives also provided services to members, mainly machine cultivation and the spreading of chemical fertilizers and pesticides. Many cooperatives provided these services to nonmember households, too, but members often received the services at a lower price. The majority of the cooperatives specialized in large-scale, mechanized production, especially in grains. In 1994, 92 percent produced wheat and either corn or barley and 10 percent of cooperatives complemented this by also raising livestock. Only 20 percent of cooperatives produced fruit or vegetables. In addition to offering agricultural services to local households, a few cooperatives were involved in other, nonagricultural activities. About 6 percent were

48 The Evolution of Agrarian Institutions engaged in commerce in 1994, and 4 percent produced nonagricultural consumer goods.

Like households, these new cooperatives functioned in a context of weakly and unevenly developed markets. Cooperatives were much less dependent on markets for resources, however, due to their ability to pool members’ land and shares of old TKZS assets. Even in villages where two or three new cooperatives exist, they have often simply divided the TKZS’s resources among themselves. In acquiring these assets, the cooperative managers have worked through traditional methods, negotiating with local interest groups and avoiding reliance on markets for resource allocation. For example, the use of share coupons to collectively purchase TKZS assets was often arranged in negotiations between old farm managers and liquidation commissions (sometimes these were in fact the same person) (Begg and Meurs 1998). A full 87 percent of the cooperatives surveyed by ABBC acquired their machinery by pooling vouchers of members, while 96 percent of cooperatives acquired buildings in this way (1996, 22, 25). Prior to the distribution of land to members, cooperative managers often also negotiated the lease of large blocks of land from the liquidation commission (Kaneff 1997; Meurs 1993b, 1994). While cooperatives have not depended on markets for the acquisition of large contiguous land parcels, they nonetheless appear to have been leaders in the development of the fledgling rental market in land. Of the member-owned land held by the ZPKs in 1994, cooperatives rented out 8 percent, the majority of this going back to members. In this way, cooperatives helped coordinate exchanges between households. Those with excess land of a certain quality could rent it to the cooperative. The cooperative, in turn, provided a central location where those seeking more of a certain type of land could inquire about leasing. Sixteen of the seventy-nine cooperatives also rented land in from nonmembers in 1994. Three rented large amounts (an average of 197 ha) from liquidation commissions, as restitution was still far from complete in their village, while the majority rented smaller amounts from private persons (an average of 63 ha total). As a result of the process of acquiring TKZS assets, the majority of cooperatives were well endowed with machinery. Most (87 percent) used their own machinery in production (ABBC 1996, 22), although many also leased additional machines or hired machine services. Despite limited member participation in cooperative labor, cooperatives also mainly provided their own labor. Skilled labor was rarely hired by the cooperatives in 1994, and the hiring of permanent manual labor was also minimal: only seven cooperatives hired permanent nonmember laborers. Thirty-five cooperatives, however, did hire field-workers on a temporary basis during peak periods—an average of 204

Decollectivization in Bulgaria 49 person-days per cooperative—and thereby contributed to the development of a local labor market. While cooperatives generally supplied much of their own capital and labor, the use of markets to acquire these inputs varied significantly by region. Cooperatives of the northeast, which owned significant numbers of machines, relied much less than did cooperatives in other areas on rental markets for machinery and machine services. In the vegetable-growing regions of central Bulgaria, cooperatives relied relatively more on seasonal, nonmember labor than did cooperatives in other regions. Some cooperative resources did have to be acquired through markets by nearly all cooperatives, and in some cases cooperatives appear to have been in a better position to acquire these resources than were private farmers. Whereas few private farmers could or would participate in credit markets, cooperatives were much more likely to do so: 53 percent of cooperatives surveyed had borrowed within the past two years. Most often the borrowed working capital was supplied by banks (91 percent of cooperatives), both state and private. Although the state subsidized one-third of the interest on agricultural bank loans in 1993 and 1994 (Zagorska 1994, 6), banks were very hesitant to make these loans because of the perceived inability of the state to pay its share of interest. Of the total 5 billion leva of promised credit in 1993, only about 1 billion was actually allocated (Davidova 1993, 174). Cooperatives had two advantages over private farmers in securing this credit. First, in the context of credit rationing, old personal links between farm managers and bank managers (both well-known regional personalities under the old system) played an important role in securing loans (World Bank/EC-PHARE 1993, 39). Second, even when cooperative members did not have legal title to their land, the cooperatives themselves often had legal title to large amounts of fixed capital that could serve as collateral. Firms accounted for the other 9 percent of cooperative borrowing. These were usually agricultural processing firms, many of which were still state owned and could use their access to state credit to provide farms with working capital in exchange for the right to purchase final production. The cooperatives were attractive business partners for these firms both because cooperative farm managers were usually known from pre-1989 dealings and because the large-scale cooperatives offered cost advantages through highvolume purchases. As noted previously, the majority of cooperatives (sixty-seven) relied on machine rental markets and the contracting of machine services for part of their mechanized work. About half turned to state firms for this, while others

used machines from other cooperatives or liquidation commissions and 15-20 percent hired from private firms or persons (table 3.2). Like private

50 The Evolution of Agrarian Institutions households, cooperatives had a limited choice of suppliers for machinery: only about 10 percent of cooperatives reported having a choice of providers for machines or machine services. In other input markets, cooperatives also faced a limited choice of sup-

pliers, similar to that faced by households. State firms supplied the largest number of cooperatives with seeds (48 percent), fertilizer (38 percent), herbicides (33 percent), and spare parts (38 percent), although the dependence of cooperatives on state firms was slightly less than that of private farmers. Private firms had already become important suppliers of certain inputs, selling to nearly one-quarter of those cooperatives purchasing chemical fertilizers and herbicides. To date, agricultural supply cooperatives have been relatively inactive in servicing production cooperatives, selling to only 4 percent of ZPKs (table 3.2).

Some competition among suppliers was apparent. Like households, significant numbers of cooperatives (although less than the majority) reported

having a choice of three or more suppliers for seed and chemical inputs (twenty-one and thirty-three cooperatives, respectively). Markets for spare parts and machines remained more concentrated, however, with few farms reporting a choice of input suppliers. The districts closest to the city of Sofia and those in the grain region of the northeast were most likely to have highly com-

petitive input markets, with the majority of purchasers in these regions reporting a choice of three or more suppliers for combined purchases of seeds, chemicals, machines, and spare parts. Also like households, cooperatives already enjoyed relatively developed markets for many products in 1994. Still, they were more likely than households to continue to market through state firms, perhaps due to the large volume of production, which large state firms were better equipped to handle and which might give cooperatives a bargaining advantage if the production could

be sold to one source. Sixty percent of cooperatives still marketed grain through state firms, although most cooperatives reported a choice of at least three buyers. Thirty percent of cooperatives that marketed vegetables sold to state firms, but few of these cooperatives reported a choice of more than three buyers, perhaps because cooperatives were less likely to sell directly to the public than were private farmers. Despite facing a context of generally underdeveloped and uncompetitive markets similar to that faced by private farmers, the larger, more mechanized

cooperatives reported doing quite well. Most (62 percent) reported no debts, and only one of the seventy-four working cooperatives reported losses in 1994. Six other cooperatives were unable to earn enough to recapitalize their assets, while the remaining sixty-seven cooperatives (90 percent of working cooperatives) earned positive profits. Cooperatives surveyed in 1995 by the ABBC

Decollectivization in Bulgaria 51 were also profitable: 71 percent reported earning a positive profit, while 22 percent reported breaking even (1996, G-22). The cooperative farms thus appeared to offer a viable form of resource allocation under the difficult conditions of the mid-1990s. Many earned profits, which were reinvested in agriculture and which also provided a small amount of supplementary income to small landholders.

Two Models of Cooperative Persistence To examine the degree to which households incorporate private land into cooperatives in response to the context of weakly developed markets and high transaction costs or social norms that favor collective forms of organization, | developed a linear OLS model of persistent cooperativization by okrug. I measured cooperative persistence by the share of households placing land in cooperatives in 1992 and 1994. I used the survey data from 1992 and 1994 to estimate the level of market development in each okrug. Data on crop type provide a measure of exposure to transaction costs resulting from weak market development. By drawing on available okrug-level data, I also developed proxies for local social factors that may influence household decisions: historical as well as current political and social norms. To capture the changing dynamics over the period 1992-94, I estimated separate equations for the two years. According to our analysis, households’ choices of how to use their land may be influenced by the given set of historically known and accepted methods of organization. To examine the role of historical precedent in suggesting solutions to current coordination problems, I included prewar data on two variables—the prevalence of cooperatives in the region in the period before 1944 and the popularity of political parties favoring collectivist solutions to economic problems. The first variable, COOPS39, measures the number of all types of cooperatives in each okrug in 1939. As noted, these cooperatives played an essential part in rural production in areas where they existed. In the prewar period, nearly all political parties supported the use of rural cooperatives to promote agricultural development, but the Communist and Agrarian Parties offered coherent collectivist models of organization in agriculture. Support for these parties may thus also capture the existence of social norms that favor collective forms of organization. VOTE46 measures the share of votes earned by these two parties in each okrug in the last free election—1946 (BNIS 1946).

To capture the impact of current social norms on organizational choices, I included a measure of support for the BSP in the most recent election (here denoted as VOTE91 and VOTE94) (Koulov 1995). A tradition of cooperative

52 The Evolution of Agrarian Institutions organization and past and present support for procollectivist parties were all expected to decrease the acceptability of private farming and thus increase the percentage of households that would remain in cooperatives. To measure the impact of market development on the persistence of cooperativization, I developed an index of marketization (MRKTIND) for each okrug in 1992 and 1994, This index is based on the percentage of households in the okrug using land, labor, and credit markets and on the degree of reported competitiveness of markets for other inputs (fertilizer, pesticides, and spare parts, taken together). However, very few households used markets for agricultural inputs in the early 1990s. To magnify the small differences in market development, each okrug was given a ranking of 1 to 4 for each market, based on its quartile ranking in the share of households using each type of market. No weighting was assigned to the four markets since we know too little about the relative importance of land, labor, machinery, and credit markets in permitting the organization of a viable farm. MRKTIND91 and MRKTIND94 measure the average score for all four markets. Reported use of markets is an imperfect measure of the transaction costs, since some households may not need to use markets to adjust production, even where well-developed markets exist. Still, the index provides one approximate measure of transaction costs involved in organizing a viable private farm. Greater levels of market development were expected to reduce the transaction costs involved in private farming and thus to be negatively correlated with the persistence of collective farming. Because of the importance of economies of scale in grain production, weak development of agricultural input markets is more likely to impact upon new private farmers in the more heavily grain-oriented regions than those seeking to organize farms in regions where labor-intensive products, suitable to small-scale production, have traditionally dominated. A measure of the importance of grain in the okrug thus offers an approximate measure of exposure to any transaction costs related to the development of input markets. To capture this effect I included the variable GRAIN, the share of okrug land devoted to grain production in 1987.° Higher levels of GRAIN were also expected to encourage the persistence of cooperatives. The model is thus: COOP = f (MRKTIND92/94, GRAIN, COOPS39, VOTE46, VOTE91/94). The model generates distinct results for the two years 1992 and 1994, revealing changes in the dynamics underlying the persistence of cooperative organization. While in both years the transaction costs involved in forming large-scale farms appear to play a role in cooperative persistence, this model suggests that the social norms included here had an impact only in 1992. By 1994, their impact had faded. As seen in table 3.3, in 1992 both GRAIN and COOPS39 were significant (GRAIN at p < .05, COOPS39 at

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Decollectivization in Hungary 69 predominated: 80 percent of full-time agricultural employees were under fifty years of age in the early 1980s, while another 30 percent were under the age of thirty (Swain 1987, 27). The rural population was relatively poorly educated, however, with only 16 percent of those eighteen years and older having completed a secondary education and under 4 percent having completed

a postsecondary degree (HNIS 1992, 7-8). The relative youth of the rural population would seem promising for the development of both private farming and new forms of agricultural cooperatives after 1989. Lack of formal education and the deskilling of agricultural work under central planning may make it hard for members of the rural population to compete as private entrepreneurs, however, or even to participate actively in the management of new cooperatives.

Hungarian Rural Reform: The Context Overview of Economic Context The Hungarian economic reform has gone relatively smoothly by East Central European standards, perhaps because of the extensive reforms instituted prior to 1989 and Hungary’s proximity to western Europe. Still, the ease of reform should not be overstated. Gross domestic product fell in every year from 1989 through 1993, leveling off in 1994 at levels below those of 1980. The unemployment rate hovered between 10 and 11 percent from 1992 to 1994, while real wages fell through 1993 before starting to rise again in 1994 (European Commission 1995, 37). The domestic downturn resulted in a 30 percent reduction in domestic food consumption (Kovach 1995). Agricultural exports stagnated from 1989 to 1991 but then fell about 30 percent from 1992 to 1993 before beginning to grow slowly after 1994 (HNIS 1994a, 198; 1995a, 282; OECD 1994, 37). This overall collapse in agricultural demand exerted downward pressure on food prices, which were freed by the Hungarian government in 1990.

Further downward pressure on agricultural purchase prices has come from the relatively slow transformation of product markets. With the exception of the canning industry, state-owned food and agricultural processing industries in Hungary were organized into megye or national monopolies prior to 1989. Privatization of the state firms proceeded relatively quickly in some of these markets, such that as of May 1993, seventy-eight of the 138 state-owned food processing and agricultural supply firms had been transformed into joint-stock companies and thirty-six had been at least partially

70 The Evolution of Agrarian Institutions privatized. Privatization was particularly rapid in industries such as vegetable oils, distilling and brewing, sugar, and tobacco. Other industries, including meat and dairy processing, grain milling, and canning, were slower to privatize, however, with no grain milling firms privatized by May 1993 (OECD 1994, 65-66). Even with privatization, many of these industries continue to exhibit high levels of concentration. The Hungarian oilseed processing monopoly was pri-

vatized as a single firm, and the tobacco industry was privatized into four firms. Privatization plans called for the breakup of other state firm monopolies, including the local grain milling, dairy, and meat processing monopolies, but as of May 1993 no progress had been made on this. Many private producers, especially in grain and livestock markets, faced a single buyer when seeking to market their goods. Access to export markets was also slow to open. The largest five export firms controlled 50-97 percent of most agricultural markets in 1992 (OECD 1994, 73). Agricultural input prices, on the other hand, quickly adjusted to world levels as prices were freed, partly due to the same perpetuation of market concentration. With agricultural demand falling and input prices adjusting to world levels, agricultural producers were caught in a price scissors. By 1992, industrial prices had reached 368 percent of their 1980 level, while agricultural prices reached only 226 percent of those levels, and the price scissors continued to widen over the next two years (HNIS 1992, 155; 1995a, 198). With drastic cuts in farm-specific operation subsidies, investment subsidies, and export subsidies after 1990 (in 1991 agricultural subsidies fell to 38 percent of the 1986—90 levels) (Info-tarsadalomtudomany 1996, 65), rural producers watched profit margins shrink drastically.

These pressures contributed to a decline in agricultural production. In 1992, cereal production fell from an annual average of 14 million tons during the period 1986—90 to 10 million; vegetable production fell from 2 million tons to 1.4 million tons; and livestock production fell 2.3 million tons to 1.7 million. Levels of production remained basically unchanged from 1992 through 1994 (HNIS 1992, 140, 148; 1995, 178). The decline was manifested in both decreased sowing of land and falling yields, as the use of fertilizer and other chemical inputs dropped in response to the price scissors (HNIS 1992, 152; 1995a, 197).

It was in this difficult climate that rural households had to choose whether to invest in land and then whether to farm their land individually or rent to another farmer or a cooperative. The price squeeze clearly affected both private and cooperative producers, but any transaction costs or bargaining advantages offered by cooperatives would be particularly important in this context of narrow profit margins.

Decollectivization in Hungary 71 Political Changes and the Legal Basis of Agricultural Restructuring After the political events of 1989, there was little question that Hungarian agriculture would undergo radical privatization. But how this would occur was the subject of some heated political debate. The Smallholders Party advocated a complete return of land held by collective farms to those who owned it in 1945. Other parties represented in Parliament advocated a slower transition from collective farming and the development of a mixture of organizational forms. The majority of cooperative members, polled during the early 1990s, preferred that the cooperatives not be broken up into smallholdings. One point central to the debate was the relative benefits of large-scale versus small- or medium-scale farming and the potential loss of the productive base (large-scale machinery,

buildings, and plantations) that might result from the breakup of collective farms (Agnocs and Agnocs 1994). In 1991, compromise legislation was passed that incorporated some of the concerns expressed by the various positions. The resulting legislation required neither the return of land to its precol-

lectivization owners nor the forced breakup of collective farms. The Compensation Law did offer compensation to all Hungarian citizens whose assets or lands were confiscated during collectivization. In a reflection of the substantial rural dissatisfaction with the prewar distribution of land, however, the compensation was partial and contingent on the level of the damages claimed by the individual. Individuals claiming losses under 200,000 forints could receive 100 percent compensation, while, at the other extreme, those claiming over 500,000 forints in damages were compensated at a rate of only 10 percent (OECD 1994). Compensation coupons did not have to be used to buy land. They could be used in any combination of the following ways: to purchase a small business, apartment, or shares in Hungarian companies; to purchase annuities that provide an annual flow of income for life; or to purchase land, under the condition that the claimant cultivate the land for at least five years (or rent or lease it to someone who would) prior to selling it.

Claimants seeking land had until December 16, 1991, to present their claims to the megye compensation offices for settlement. These offices then to-

taled the compensation claims and reported to the local collective or state farms the value of claims filed against land under their control. The farms had thirty days to designate the land that was to be made available for compensa-

tion—land of equivalent quality to the restitution claims filed against the farm. Land set aside for compensation was subject to a government-set limit of 40 percent of arable land owned by the farms (Agnocs and Agnocs 1994,

72 The Evolution of Agrarian Institutions 42), resulting in a total of 1.25 million ha being set aside for compensation. The collective farms also lost control of another 2.2 million ha that was formally registered to individual owners but under the control of the collective farms (OECD 1994, 54, 56). Some compensation fund land was eventually returned to farms, however, as not all land was eventually claimed. Once land had been designated for compensation, auctions were held. To protect against speculation, strict rules were established. Only the original

owner of a voucher could use it to buy land, even though compensation coupons are generally negotiable. The coupon holder could use the coupons only in certain areas—the area where the land was originally confiscated, the area where the coupon holder currently resided, or the area where the coupon holder was a cooperative member on January 1, 1992 (Swain 1997, 228). In ad-

dition, as noted earlier, the purchaser had to keep the land under cultivation for a minimum of five years. Although the Hungarian government sought to compensate those who had lost property through the collectivization process, no explicit attempt was made to eradicate collective farming. This decision can perhaps be attributed to the successes achieved by the collective farms in becoming modern, exportoriented producers in the 1980s. The collective farms, with their remaining land and assets, were to be transformed into shareholding cooperatives by December 31, 1992, under the Law on the Transformation of Cooperatives. Two types of shares would be issued to cooperative members: cooperative (active) shares and business (passive) shares. The cooperative share would be issued to those choosing to continue to work in the cooperative. This type of share would be nontransferable, and a member eventually leaving the cooperative would have to sell the share back to the cooperative. Business shares would be allotted to former members who chose not to continue to work in the cooperative. These shares would be transferable, inheritable, of varying nominal values, and would pay an annual dividend but would not convey any voting rights in the cooperative. Former members could also use their shares to withdraw real assets from the cooperatives through 1992.4 The Hungarian agricultural reform thus offered significant choices to those eligible for compensation. Agricultural land and machinery were allocated only to those who chose this form of compensation over others, and those buying land at compensation auctions could also choose the size and location of land parcels purchased. Still, many people did not claim land with the intention of farming it. Land was also bought as an investment or by rural dwellers drawn up in the excitement of the compensation auctions, which were a major event in village life (Swain 1997). At the same time, the reform left large parcels of land and other assets in the hands of cooperatives. Some cooperatives, especially those carrying

Decollectivization in Hungary 73 significant debts from before 1989, proceeded to sell and lease most or all of these assets to eager private entrepreneurs. Others continued to farm as restructured cooperatives

The Emergence of Private Farming Overview of the Land Redistribution Process As we have seen, the renting out of collectivized land for private farming began well before 1989. As possibilities for such rental increased after 1990, some large blocks of land were taken, mainly by entrepreneurs with connections to the Communist Party (these early beneficiaries of the reform came to be called “Green Barons”) (Agnocs and Agnocs 1994). Small family farms also increased their holdings in 1991, however, by renting small amounts of land from the collective farms. This increased the share of larger private plots (over 2 ha) from 21 percent of plots before 1989 to 27 percent in 1991 (Harcsa, Kovach, and Szelenyi 1993, 45). In 1991, private producers controlled 14 percent of agricultural land. This early restructuring proceeded unevenly, however, with the southeastern plains megye of Bekes leading the process in 1991, while lit-

tle progress occurred in the western regions of Vesprem, Zala, and Fejer (Harcsa 1991, n. 28). Despite some early changes, the majority of Hungarian agricultural land was still owned by cooperatives in 1992. After about 1,700 land auctions, the land sold accounted for only about 4 percent of eligible compensation vouchers (Harcsa, Kovach, and Szelenyi 1993, 43). Land auctions were not completed by the March 1993 deadline, and although by January 1994, 340,227 families had received land (Kovach 1995, 5), auctions continued well into that year. Initially, the majority of coupon holders bought small plots, which they rented back to the cooperatives (90 percent of land acquired at auction by May 1993 was leased back to cooperatives) (Kovach 1995, 5; OECD 1994, 56). As a result, cooperatives continued to farm 55 percent of arable land in 1993 (HNIS 1993; 1994a, 174). By May 1994, however, a very significant restructuring of ownership of agricultural land had been completed, and the new owners had taken the majority of agricultural land out of the cooperatives. Only 29 percent of agricul-

tural land (40 percent of arable land) in Hungary remained in cooperatives (table 4.1). Still, the speed of restructuring differed significantly by megye. In Pest megye, nearest to the capital Budapest, only 16 percent of agricultural land

remained under cooperative management, while cooperatives continued to farm significant shares of land in the western megyes of Vas and Somogy (ap-

74 The Evolution of Agrarian Institutions TABLE 4.1. Land in Cooperatives in Hungary, 1992-94 (in percentages)

1992 1994

Type of Land Owned Farmed Owned

Agricultural 29 Arable 6045644840 Source: HNIS 1992, 1994b

proximately 38 percent of agricultural land). Bekes, the early leader in decollectivization of agricultural land, was now among the megyes with the greatest percent of land still in cooperatives (30 percent) (HNIS 1994b).

Private Farming: An Early Picture Clearly, private farming in Hungary was already well under way prior to 1989. Data from a census of 80,000 agricultural households done by the Hungarian National Institute of Statistics (HNIS) in 1991 permit a detailed look at the extent and form of private farming in the earliest stage of transformation. A random subsample of 11,209 households was drawn by the HNIS in order to provide the data used here.°

The agricultural land farmed privately in 1991 was farmed in plots that averaged only 3 ha. But plot sizes varied widely. Nearly half of the households worked farms under 1 ha, while 6 percent worked farms of over 10 ha. A small number of entrepreneurs rented very large farms—up to 577 ha (HSD 1991). In this early period, private holdings were most often simply an extension of the socialist private plot system and were concentrated in regions specializing in labor-intensive crops, such as wine grapes (Harcsa 1993, 5). Private households also raised significant numbers of livestock in 1991, again in an expansion of practices prior to 1989. Mainly, this continued to be a small-scale activity, but some sample households in 1991 kept up to fifteen cattle, thirty-six horses, 170 pigs, 200 sheep, and 1,000 poultry (HSD 1991). Market relations continued to develop around private production. Eight percent of households rented land, buildings, or machines; 5 percent hired agricultural workers; and about 1 percent borrowed money through official credit markets. Few small farmers in 1991 owned agricultural equipment. About | percent of households owned a tractor of some kind, 1 percent owned a milking machine, and about 3 percent owned engine-operated sprayers. Rototillers were more common: 12 percent of households owned one. As a result of the machinery shortage, many (41 percent) hired machine or draft services (table 4.2). Of course, these were market relations in a limited sense. Most

Decollectivization in Hungary 75 land, buildings, and machinery were rented (as before) from the local collective farm, which continued to be the only available provider (HSD 1991). As they did in the 1980s, in 1991 small farms sold 65 percent of their produce. Of those farmers who reported sales, the majority had already shifted at least some sales to private retailers or individuals, while 56 percent still sold to large (state) firms, many of which were local monopolies, as noted earlier. Some of this commercial production was quite specialized. One-third of the

farms drew 75 percent or more of the gross value of production from one product (mainly from pork or cattle production).© Nearly one-quarter of households specialized to a lesser degree (Harcsa 1993, 14-18). Despite the existence of these highly specialized and commercialized private farmers, for the majority of households agriculture remained a sideline,

mainly subsistence, activity. Istvan Harcsa argues that in 1991 Hungarian farmers were already separating into two distinct groups (1993). One group of better-educated and better-capitalized farmers specialized in a few crops for commercial use, and another, larger group of less-educated small farmers pro-

duced a diverse group of products for household consumption and supplementary income. The majority of small farmers reported no significant sales of production. Of those farming at least 1 ha (or 200 square meters of greenhouse land), 90 percent reportedly did not sell a significant quantity of production in 1991. Only 38 percent of farmers reported agriculture as their main employment. Many of the commercially oriented farmers were newcomers to agriculture. About half of the new full-time farmers were skilled workers who began farming in the 1980s or later. Twenty-eight percent of them came from careers outside of agriculture, while many others were top agricultural specialists who used their connections with the collective farms to acquire leases on land and to farm (Harcsa 1993, 6, 13-21; n.d., 3—4). By 1993, the number of full-time private farmers had grown from 78,700

in 1988 to 120,000 and part-time farmers had grown from 1,400,000 to

TABLE 4.2. Use of Agricultural Input Markets in Hungary, 1991-94 (percentage of farmers)

199] 1992 1994

Credit 1 5 6

Input All Farmers Top Farmers Top Farmers

Machines 62 Land 8*41465932

Labor 5 28 32 *Includes building rentals

76 The Evolution of Agrarian Institutions 1,500,000 (Kovach 1995, 5). By 1994, 1,675,000 private farmers controlled 28 percent of arable land, while another 20 percent was controlled by limited liability companies, partnerships, and other legal forms of private land (HNIS 1994a, 176). The vast majority of these farmers continued to farm small plots. Eighty-six percent of households held under 1 ha, while only 1 percent farmed over 10 ha. Livestock production was also done on a small scale. Among those keeping cattle, for example, only 4 percent had more than eleven head (HNIS 1994a, 190-92).

Emerging Private Commercial Farmers While the emerging large, commercial farmers remain a minority, it is these private farmers who have played the major role in transforming the organization of agriculture. Some semisubsistence households have bought or leased small amounts of land to augment their plots, but it is among the commercial farmers that we find the source of the large-scale transfers of land from cooperative to private production. To examine the nature of this sector and analyze the conditions that have contributed to its development, 1,800 of Hungary’s top farmers were surveyed in 1992 and 1994.’ These were farmers who reported producing over 500,000 forints of agricultural production in the 1991 census, a group that made up the top 2.5 percent of all privately run farms. The sample was randomly drawn from all megyes in Hungary, then adjusted

in some cases to ensure sufficient representation of all production types (grain, livestock, and other main categories). All uncited data in this section are drawn from these surveys (HSD 1992, 1994). As suggested, the survey data reveal that by 1992 these commercial farmers were already quite distinct from the total population of farming households surveyed in 1991. As we will see, the top farmers farmed significantly more land, owned more machinery, relied more on market transactions to organize production, and produced more often for commercial, as opposed to subsistence, purposes. Table 4.3 summarizes the differences between the top farmers and the general farming population. The data confirm that, by 1992, a group of well-capitalized commercial private farmers had already emerged in Hungary, using markets, and perhaps also connections, to organize largescale farms.

Top farmers surveyed in 1992 owned an average of 22 ha, but average landholdings varied widely across megyes. Fejer, near Budapest, had the smallest average holdings (8 ha), while Csongrad, in the Great Plains, had the largest (54 ha). Overall, the largest average owned holdings were in the Great Plains,

while the smallest were in the more mountainous megyes of northeastern Hungary.

Decollectivization in Hungary 77 TABLE 4.3. Comparison of All Farmers and Top Farmers in Hungary, 1991-92

All Farmers Top Farmers

199] 1992

Large Small tractor tractor1222 7

Machines owned (%)

Rototiller(%)123323 Specialized Land farmed (ha) 3 64 90 Source: HSD 1991, 1992

Top farmers increased their farm size through an active land rental market in 1992, hiring in an average of 69 ha and farming an average of 90 ha (table 4.3). Forty-six percent of households hired in land, and leasing was an important source of farmland in all megyes—for both large and small average farm sizes. Surprisingly, farmers’ reliance on leased land was not correlated with the degree of continued cooperative control of land in their megye. Farm size, however, was negatively correlated with the share of land remaining in cooperatives.® Slow decentralization of landownership made large individual farms either more expensive or more difficult to organize. Cooperatives and state farms were the main sources of leased land in 1992 (45 percent and 30 percent, respectively). Private individuals contributed only an average of 6 percent of land leased in by private farmers in each megye (table 4.4). But in a few megyes, where total leasing and farm size were limited, pri-

vate landholders were an early source of leased land. These included Komarom, Bekes, and Szolnok counties, where about 20 percent of leased land came from private landholders. By late 1994, when the land auctions had been mainly completed, average landholdings of top farmers had increased greatly, to 113 ha. Average land-

TABLE 4.4. Source of Land Farmed Privately in Hungary, 1992-94

1992 1994

Avg. Ha % of Land Avg. Ha % of Land

Owned 21.568.8 24 76 112.5 Leased from 81.5 58 42

Private 4.]316 45 41.6 51 Cooperatives 26.9 33 State farms 20.6 30 Other 13.1 19 13 16

Source: HSD 1992, 1994

78 The Evolution of Agrarian Institutions holding continued to differ greatly across the megyes. Fejer was still among the counties with the smallest average holdings, but by 1994, the largest average

owned holdings were in the megyes of the Northern Uplands. This was perhaps because of the extensive nature of agriculture in this mountainous area or because of the relatively industrialized nature of the local economy, which has traditionally provided nonagricultural employment to the rural population and thus reduced the attractiveness of expanding private farming for all but a few households. As the size of owned parcels grew nationally, so did farm size, such that by 1994 top farms averaged 189 ha. Like owned plot sizes, the largest average farm size was found in the Northern Uplands. With private landownership growing, farmers hired in a smaller share (42 percent) of their land and fewer households hired land (32 percent). By 1994, farm size was no longer correlated with the share of land held by cooperatives but was instead correlated with owned land.? Landownership was already being driven by households’ engagement in farming, at least among this group.

Individuals had become the biggest suppliers of land to top farmers (51 percent of hired land), increasing competition with cooperatives in land markets. Another 33 percent of hired land was still hired from cooperatives (table 4.4). The displacement of cooperatives by private land suppliers was not uniform, however. The cooperative remained the largest supplier of land to private farmers in Zala and Nograd, for example, while in Fejer and Vesprem the state still supplied the majority of hired land. Compared to the general population of farmers, top farm households had much more machinery (table 4.3), and the amount of machinery owned increased significantly during the period 1992-94. In 1992, 22 percent of commercial farm households owned a large tractor (over 8 kw), although only 3 percent owned a harvester. Commercial farmers also owned small machinery: 7 percent of households owned a small tractor, while 23 percent owned a rototiller. By 1994, 35 percent of households owned a large tractor, although ownership of harvesters remained low (6 percent of farms). Most of the increase in machinery resulted from initial capitalization of farms, as opposed to the purchase of a second or third tractor by highly capitalized farms. Like landownership, households’ capitalization also differed greatly by region. Over the period 1992-94, machinery was concentrated in the large farms of the industrialized Northern Uplands and in the western Transdanubia region. Top private farmers in the grain-oriented Great Plains, surprisingly, had less machinery. Despite significant machine ownership, top farm households also continued to depend

heavily on the hiring of machine services. Fifty-nine percent of households hired machinery in 1992, and 62 percent hired in 1994 (table 4.2). Although households of commercial farmers were small, averaging 2.8 members, and had few children (an average of 2.7 members were over twenty

Decollectivization in Hungary 79 years of age), they did not depend heavily on labor markets for farm labor. Instead, they performed the majority of work themselves. In 1992, over half of the top farm households had at least one member working full time in private agriculture and 11 percent had two members working full time. Only 28 percent of households reported hiring some labor. By 1994, fewer farms employed a household member full time (46 percent), while a few more households (32 percent) hired labor. Four percent hired full-time wage workers, and 30 percent hired some part-time workers (table 4.2).

Compared to only 33 percent of all farmers, 64 percent of top farmers were highly specialized in 1992 (table 4.3), earning 75 percent or more of their gross value from one crop. Another 26 percent were specialized to a lesser extent. Larger farms were significantly more specialized than were smaller ones.

Although the data on farm specialization are slightly distorted by the need to sample the full range of product specializations, general patterns are clear. As was the case for private farms prior to 1989, in both 1992 and 1994 the majority of top farms specialized in livestock, mainly pigs, poultry, and cattle, while also producing some grain. In a few megyes, farmers reported greater specialization in labor-intensive plant products, such as fruit, vegetables, and wine, and these were dispersed over all three geographically diverse regions:

Great Plains, Transdanubia, and Northern Uplands. Over the period 19921994, some shifts in production took place. Top farmers moved increasingly into vegetable production (the share of top farms producing vegetables rose from 10 to 14 percent). Among livestock producers, the importance of cattle increased (from 19 percent of households to 36 percent) at the expense of pigs (from 62 percent of households to 51 percent). The majority of households keeping livestock in 1992 and 1994 found this to be a profitable activity. Production in other branches, even among the commercially oriented top farmers, was not so lucrative. The majority of those

producing grain reported that this was not a profitable activity. Grain was grown by top private farmers mainly as an input into livestock production, suggesting that input markets in livestock production were still inadequately developed. The more labor-intensive plant products were also unprofitable for most households. Only about 20 percent of fruit producers reported a profit in either 1992 or 1994. Among vegetable growers, only 13 percent reported a profit in 1992, and as more top farmers entered this field in 1994, the share of producers reporting a profit fell further, to 5 percent. Unlike the general population of farmers, many of the new commercial farming households had begun relying on credit markets for agricultural capital even before the reforms of 1989. In each year during the period 1985-90,

a steady 3.6 percent of top farming households surveyed had borrowed for agricultural purposes. With the opening of markets in 1990, the share of top

80 The Evolution of Agrarian Institutions farmers borrowing jumped to 21 percent. The use of credit among these farmers declined the following year, however, hovering between 5 and 6 percent for the years 1991-94. The return to lower borrowing levels perhaps reflects the completion of initial capitalization of farms and the worsening economic conditions (table 4.2).

As these data suggest, both private agricultural production and certain agricultural markets were fairly well developed in Hungary by 1992, with commercial private farmers relying heavily on markets (mainly land and machinery) to adjust production and inputs. While private agriculture continued to develop rapidly through 1994, reliance on markets for land actually decreased over this period, while labor and machine markets expanded only modestly. It appears that this slowdown in market development was demand driven, in the sense that most top farmers’ needs for exchange and adjustment of resources declined after the land auctions and the initial period of capitalization and had essentially been met by existing levels of exchange. Under the conditions of stable but weak agricultural demand, few farmers required additional adjustments.

Agricultural Production Cooperatives Alongside the private, individual farmers described, cooperatives continued to farm a significant share of Hungarian land through 1994. By the December

1992 deadline for the transformation of all previously existing collective farms, about 1,270 collective farms were transformed into shareholding cooperatives, while the remaining 170 collective farms were closed down. Surviving cooperatives restructured substantially. Holdings fell from 45 percent of agricultural land in 1992 (60 percent of arable land) to 36 percent of agricultural land in 1994 (40 percent of arable land). Many cooperatives also spun off independent production units belonging to the former farm, especially sideline activities (Kovacs 1996, 141). Both land sales and the fragmentation of single cooperatives into multiple units reduced cooperative size. Average size fell by more than half—from 2,891 ha in 1992 to 1,331 ha in 1994. Cooperative membership dropped, too, from over 300,000 members in 1992 to only 106,300 in 1993. By 1994, cooperatives had only 105,600 full-time worker-members and 1,800 part-timers (HNIS 1993, 154; 1995a, 197). While smaller than their collective farm predecessors, these cooperatives remained large, mechanized production units. A 1996 survey of 446 cooperatives by the HNIS allows a more detailed examination of the characteristics of the transformed cooperatives (HSD 1996). This survey is the source of all uncited data in this section.

Decollectivization in Hungary 81 The survey data suggest that by 1996 cooperatives farmed an average of 1,920 ha. A small amount of this land was still owned by the cooperatives, but mainly cooperatives leased land back from smallholders in an active rental market. Only one-quarter of cooperatives reported owning land, and for these cooperatives the owned land averaged only 337 ha. The vast majority of cooperative land was rented in from members or other nonmember individual owners. A small number of cooperatives also rented land in from other cooperatives, companies, or the state. Few surveyed cooperatives (15 percent) rented out land in 1996. When they did so, they rented mainly to members. While cooperatives had divested ownership of most land, they continued to own significant amounts of machinery. Nearly all cooperatives owned a number of large tractors and several harvesters, and most also owned some smaller tractors (under 40 kw). Cooperatives frequently obtained this machinery by having their members pool the share coupons they received as members of the former collective farms (Kovacs 1996, 75). Often the machine capacity exceeded the cooperatives’ needs. Still, like private farmers the cooperatives often turned to markets to fulfill the machinery needs they could not fulfill themselves. Ninety-two percent rented in large tractors, 84 percent harvesters, and 65 percent small tractors. A few cooperatives (five to eight) also rented machinery out, mainly to private agricultural firms. Cooperatives also relied more heavily on credit markets to organize production than did private farmers. From 1991 to 1996, an average of about half of all cooperatives took long-term loans in each year. Short-term loans were even more widely used—an average of 64 percent of cooperatives borrowed annually. Both short- and long-term borrowing by cooperatives increased over the period. Cooperatives continued to specialize in the large-scale production they had dominated prior to 1989. A separate survey of 104 cooperatives reveals that, in 1993, 73 percent of cooperatives produced wheat, while about half produced maize or barley or both. Livestock products continued to be important as well, with 50 percent of farms producing milk and 28 percent producing pork. Few cooperatives produced fruit or vegetables (8 percent) (Toth and Varga 1995, table 15). In some cases, Hungarian agricultural cooperatives may benefit from historical relationships between farm managers and managers of input and processing firms, realizing better access to input and output markets and prices preferable to those offered to individual private farmers. The ability of cooperatives to purchase and deliver high volumes of products may also result in better contracts with suppliers and processors. Further, the bargaining position of cooperatives may also have been improved by specific privatization policies, which encouraged cooperatives to use compensation vouchers re-

82 The Evolution of Agrarian Institutions maining in their possession at the end of the process to buy shares in processing industries (OECD 1994, 66). Seventy-nine percent of cooperatives sur-

veyed in 1993 reported that they would participate in the privatization of food-processing industries, and the majority expected to do so using compensation coupons (Toth and Varga 1995, table 18). In terms of internal organization, the transformation of Hungarian cooperatives has been quite significant. As noted, many cooperatives spun off sideline activities. Some cooperatives continue to organize their remaining productive base as an integral unit, but many others (about one-third) have reorganized various branches of cooperative production as limited liability companies (LLC) (Toth and Varga 1995, table 25). In such cases, some or all of the shares of the LLC continue to be held by the cooperative, which becomes the “holding cooperative.” The LLCs have independent budgets, but their autonomy and access to credit are limited by the cooperative’s ownership relationship with these subunits. Subunits of the holding cooperatives may also be organized as more typical producer cooperatives (Kovacs 1996). As was the case with Bulgarian cooperatives, Hungarian cooperatives have both active members (members who still work in the organization) and passive members (retired members, heirs of deceased members, and so on). This situation may give rise to conflicts of interest, as the active members prioritize jobs and wages while the passive members prefer to receive dividends or social services. Elderly members may have little experience in monitoring the economic performance of managers, but they do have experience in lobbying for the delivery of cash or service benefits. Katalin Kovacs offers an insightful case study outlining such conflicts (1996). Her study highlights the importance of designing internal governance structures capable of negotiating solutions to such conflicts. Without these structures, cooperatives may be unable to remain viable in the face of increasing competition from large-scale private farmers or corporate farms. Overall, Hungarian cooperatives in 1994 persisted as a substantially re-

structured form of agricultural production. The farms were smaller, more capital-intensive, and more specialized enterprises than the pre-1989 cooperatives and continued to play an important role in Hungarian agriculture and rural life. Their importance appears destined to be further reduced, however. Cooperative farms continue to close units or spin them off as LLCs or other shareholding firms. A 1993 survey showed that 58 percent of cooperatives also expected further reductions in the areas farmed and the number of workers, as more land moved into private farming. Forty-two percent of farms expected continued changes in their organizational structure, as they

restructured into more hierarchically organized shareholding firms (Toth and Varga 1995, tables 17 and 33).

Decollectivization in Hungary 83 Whether the remaining cooperative farms can compete successfully with the emerging large-scale private farms will depend, in part, on the way that productive and governance structures evolve in the face of the conflict among the interests of managers, working members, and passive members. The current hybrid form of organization appears unlikely to be viable in the face of increased competition for cooperatives land. To gain the productivity benefits associated with cooperative organization discussed in chapter 2, the farms will

need governance structures to put workers in charge as well as incentive schemes to make them residual claimants. Alternatively, to gain the productivity benefits attributed to hierarchical organization, the farms will need to dispense with social welfare obligations to passive members.

A Model of Cooperative Persistence In this section I develop a simple, linear OLS model to test the relative impor-

tance of market development and other social and historical factors in explaining the pattern of cooperative persistence across Hungary. Following the theoretical framework outlined in chapter 2, I examine the relationship between cooperative persistence in a megye and the level of market development, the importance of economies of scale, current and historical political context, and the historical importance of cooperatives as a means of organizing smallholders. I estimate these separately for 1992 and 1994. The model is thus identical to the OLS model developed in chapter 3, although the results of the two models are subject to slightly different interpretations due to historical differences in the two cases and differences in some of the ways some of the variables are measured (both of which will be discussed). In the Hungarian case,

for which I do not have survey data on household choice of organizational form, I measure cooperativization rates by megye as the share of land in cooperatives in 1992 and 1994. One theory of cooperative persistence, as outlined in chapter 2, is that the relatively high transaction costs involved in organizing a private farm may increase the appeal of cooperative farms. The level of transaction costs involved in organizing a private farm depends on the level of development of both input and product markets and on the need for farmers to rely on these markets in organizing a viable farm. As discussed, cooperatives may potentially avoid

these transaction costs by relying on inherited land and capital to organize production and on old connections to processing and export firms and banks, which may prefer to deal with large-scale and known suppliers. As in the Bulgarian model, to measure the impact of market development on the persistence of cooperativization, I created an index of market develop-

84 The Evolution of Agrarian Institutions ment for each megye. This index is based on the percentage of surveyed households using land, labor, machinery, and credit markets in each megye in each year.'!° Megyes were given a ranking of 1 to 4 in each category, depending on

the quartile rank of the share of households using the market, and the megye market index (MRKTIND) is the average of the rankings in the four categories. As in the model developed in chapter 3, no weighting was assigned to the four markets. The Hungarian data do not provide for any measure of the degree of competitiveness in the four markets, so MRKTIND measures only the use of markets as a proxy for their availability. Information suggests that market concentration remained quite high in Hungary, at least in processing and distribution firms, through May 1993 (OECD 1994), but we have no measure of variation in the degree of concentration across megyes. Further, the index provides only an approximate measure of transaction costs faced by private farmers, since some households may not need to use markets to adjust production, even where well-developed markets exist. Still, all else being equal, higher levels of market development were expected to be negatively correlated with the persistence of collective farming.

As noted earlier, the geography of Hungarian agriculture varies significantly by region, and some regions have traditionally specialized in largescale grain production to a much greater extent than have others. Farmers in heavily grain-oriented regions were expected to have a greater need to achieve economies of scale and thus to be more vulnerable to high transaction costs in adjusting farm resources. A measure of the importance of grain in the megye thus offers an approximate measure of exposure to any transaction costs related to the development of input markets. GRAIN was measured as the share of land under grain in the region in 1987 (HNIS 1987). Higher values for GRAIN were expected to be positively related to the persistence of cooperatives. !! Alternative explanations of the persistence of collective forms of agricul-

ture suggest that historical and current social contexts can play an important role in providing solutions to farmers’ coordination problems. According to

this analysis, households’ choices of how to use their land may be less influenced by the search for high returns than by a given set of historically known and accepted methods of organization. To test for such an effect, I included data on historical and current voting patterns and the prevalence of agricultural cooperatives in the prewar period. Prewar support for the Smallholders Party (VOTE39), which promoted private farming as a solution to rural poverty, is included as a measure of social norms supporting private farming. (As noted previously, in Hungary no significant political party supported cooperative farming as a model of agricultural development.) Local electoral support for the Smallholders Party

Decollectivization in Hungary 85 prior to World War II, measured by the percentage of a megye’s Parliamentary seats won in the 1939 election, is expected to be negatively correlated with the persistence of collectivization. To capture the impact of current social norms on organizational choices, J included support for the Socialist Party in the most recent election (VOTE90 in 1992 and VOTE94 in 1994) (Szoboszlai 1990; Parlamenti Valasztasok 1994). Support was measured by the percentage of a megye’s Parliamentary seats won by the Socialist Party. In the Hungarian case, support for the Socialist Party could reflect two distinct social norms. On the one hand, it might reveal a distrust of capitalist institutions, including market exchanges and private farming. In this case, support for the Socialist Party would reflect the contribution of social norms to the persistence of collective production. On the other hand, much of the early expansion of large-scale private farming in Hungary was undertaken by the so-called Green Barons—individuals with strong connections to the Socialist Party who used their influence with cooperative farm managers to obtain leases on large blocks of land prior to compensation auctions. As a result, support for the Socialist Party could also represent enthusiastic support for the socialist “old boy” network that facilitated the new private forms of organization. In this case, support for the Socialist Party would reflect norms that encouraged the removal of land from collective forms of organization. To capture the influence of prewar experience with cooperative organization, I included the number of cooperatives in the megye in the period before 1946 (COOPS) (Hungarian Yearbook of Cooperatives 1933). Since Hungarian prewar cooperatives were mainly used by successful private commercial farmers, however, the expected impact on the persistence of cooperative farming is also not clear. Where cooperatives were an important form of prewar organization they may provide a commonly understood nonmarket method for coordinating economic actors. Such a tradition could increase the likelihood of the persistence of cooperative farming. At the same time, the fact that, historically, cooperative members were also successful private farmers suggests that individuals in areas with a lot of cooperatives would also be experienced in private production or at least aware of its potential to create economic success. In this case, norms in areas with more prewar cooperatives might be more likely to promote the withdrawal of land from agricultural cooperatives. Because of the potential for changing dynamics over time, the model was

estimated for 1992 and 1994 separately. Indeed, the tests reveal significant changes over this period. The regression results for 1992 suggest that both market and political factors are linked to differences in the pace of privatization of agricultural production (table 4.5). Both GRAIN and VOTE90 were related to levels of cooperativization of land at a significance level of p < .05.'7

GRAIN had the largest impact (B = .66), suggesting that the presence of

86 The Evolution of Agrarian Institutions economies of scale played a large and positive role in the persistence of cooperative farming. Since private farmers should be as capable as cooperatives of achieving scale economies where markets are fully developed, the significance of GRAIN links cooperative farming to weak market development and associated transaction costs.

VOTE90 also had a large, but negative relationship to cooperativization levels (B = -.50). This suggests that political norms did play a role in organizational choice. It also suggests that electoral backing for the Socialist Party (the transformed Communist Party) reflects norms supportive of private farming. Old Communist Party strongholds perhaps offered the best contracts to early innovators and, with these, illustrations of both the viability of private agriculture and the party’s support for such enterprises. While none of the other variables was significantly related to the cooperativization of land, the signs on the remaining variables are interesting to consider. The coefficients on COOPS and VOTE37 are negative but relatively small. Areas where cooperatives had been numerous before World War II had a slightly smaller share of land in agricultural cooperatives than did other areas, all else being equal, suggesting that the prewar cooperatives represented a means of promoting private farming more than an alternative to that form, although this impact was not statistically significant. The coefficient on MRKTIND is very small and insignificant, despite the importance of market development suggested by the large and significant impact of GRAIN. This is perhaps because MRKTIND does not provide a good TABLE 4.5. Regression Analysis Results, Dependent Variable: Percentage of Agricultural Land in Cooperatives by Megye in Hungary (n= 19)

1992 1994

Mean Beta Mean Beta

Variable (stand. dev.) (t-statistic) (stand. dev.) (t-statistic)

COOPS 31.11 —0.27 31.11 —0.08 (32.09) (—1.50) (32.09) (—0.30) MRKTIND92/94 2.04 0.10 2.34 0.19 (0.47) (0.46)0.08 (0.55)—0.40 (0.55) VOTE37 0.08 —0.27 (0.09) (—1.20) (0.09) (—1.32) GRAIN 37.84 0.66** 37.84(1.46) 0.47 (7.30) (3.86) (7.30) VOTE90/94 10.32 —0.50** 36.95 —0.17 (2.62) (—2.66) (4.97) (—0.55) Adjusted R? 0.53 —0.11

Source: Author’s calculations * = significant at p < .10. * = significant at p < .05.

Decollectivization in Hungary 87 measure of market development due to its inability to capture either the competitiveness of input markets or the development of product markets. Still, it is interesting to note that the model reveals a small positive relationship between cooperative persistence and market development. One possible explanation for this relationship is that cooperative ownership of land actually facilitated the early development of land markets. Where land was concentrated in large cooperative holdings, and not scattered among small, private, or in-

stitutional holders, potential renters could easily coordinate the lease of a large, contiguous parcel. Where land was quickly broken up or never collectivized, on the other hand, transaction costs in securing a parcel could be quite high, potentially slowing the development of land markets. Overall, this model of market development and social factors produced an adjusted R? of .53. This is fairly robust support for the argument that market development and political norms influenced the choice between private and cooperative farming in 1992. For 1994, the model shows a much weaker relation among market development, norms, and rates of cooperativization. The model generates an adjusted R? of .11, suggesting that, by 1994, the included variables explained almost none of the variation in cooperativization levels. None of the included variables was significant, even at the level of p< .10. GRAIN continued to have quite a large coefficient (Bh = .47) and came closest to being significant at the level of p< .10. The t-statistic on VOTE declined dramatically, suggesting that current political context, as measured by VOTE94, no longer played a role in levels of cooperativization. The other variables continue to have an impact similar to that in 1992. The coefficient on MRKTIND remained small and positive, and those on COOPS and VOTE37 remained small and negative. If differences in market development and social constraints on actors’ choices explain little of the difference in levels of cooperative persistence in 1994, what does explain these differences? One possibility is that variations in the share of land made available for compensation in different counties contributed to these differences. Beyond the amount legally mandated for compensation, cooperatives were not obligated to offer land for sale or lease to private farmers. Many cooperatives did so by choice, as seen earlier, but perhaps many did not and thus prevented the further expansion of private farming. The inclusion of levels of land mandated for auction by megye did not improve the regression results, nor did this variable yield a significant coefficient, and data are not available on the amount of land voluntarily sold. Another possible explanation is that by 1994, when market development and political norms were no longer important factors in the development of private farming, the choice of organizational form was being driven mainly by

considerations of relative productive efficiency of the two organizational

88 The Evolution of Agrarian Institutions forms. If levels of market development no longer create large differences in transaction costs, then productivity considerations should become the central factor in determining relative returns to assets in the two forms of organization. An accurate measure of relative returns to landowners would be needed to test this hypothesis, but this information was not available for Hungary and Bulgaria for the period under study.

Discussion The data reviewed here indicate that a dynamic private farming sector already existed in Hungary by the end of the 1980s. This sector mainly consisted of small, part-time farms that generated supplementary income for households employed in other sectors. A significant number of large, commercial farmers had also begun to emerge, however. These were often specialized farmers who rented large amounts of land and buildings from socialist organizations. Many of these farmers relied on market-type arrangements to hire the inputs they needed, and they sold their produce freely to increasingly independent purchasing organizations. During 1991 and 1992, private farming continued to expand, as more resources were removed from the cooperative sector by both the emerging commercial farmers and smallholders. Still, in 1992, 64 percent of arable land (62 percent of agricultural land) remained in agricultural cooperatives. Moreover, large differences existed across Hungarian megyes in the level of private control of agricultural land and the development of agricultural markets. The evidence presented in the previous section suggests that weak market development contributed to the per-

sistence of cooperative farming. In particular, in grain regions, where economies of scale, and therefore resource adjustability, were important, cooperatives were more likely to persist. If markets had been well developed, private farmers should have been able to expand production and achieve scale economies just as well as cooperatives. But if markets were poorly developed, cooperatives ownership of appropriately large parcels and machinery may have reduced the transaction costs involved in organizing large-scale production, slowing the emergence of private farming. Social norms also appear to have affected the levels of private and cooperative farming in 1992. Surprisingly, however, in Hungary the areas most supportive of the Communist Party were leaders in decollectivization. This may be explained by the modern, technocratic leadership of the collective agricultural sector under the Communist Party, which supported and participated in limited, large-scale, private commercial farming in the late 1980s and early 1990s. Communist Party strongholds may have benefitted disproportionately

Decollectivization in Hungary 89 from these policies, generating more early adopters in these areas, who, operating in relatively protected markets and with state support, convinced others of the benefits and acceptability of private farming. By 1994, however, the share of arable land in cooperative production had fallen to 40 percent and neither the levels of market development, the prevalence of economies of scale, nor social or historical factors were much help in explaining differences in the level of cooperative persistence across regions. Once land auctions and the initial capitalization of farms were completed, and a basic level of market development was widely achieved, areas with greater depth in the markets for land, labor, and capital had little advantage in promoting the expansion of private farming. Perhaps a minimal level of market development was all that private farmers needed to adjust resources without incurring excessive transaction costs. Alternatively, perhaps the competitiveness in input and product markets became the important factor in differentiating transaction costs across regions, but this aspect of market development could not be tested for here. Once private farming and market exchange became widely known and familiar forms of organization, social and historical factors were also less likely to influence the choice of organizational form. Whereas privatization has often been seen as a prerequisite of market development (Munro-Faure 1995), land markets developed relatively rapidly in Hungary where large blocks of land were not returned to individual holders but were retained by cooperatives. The centralized nature of holdings appears to have contributed to the development of land markets in this case, as cooperatives provided a ready source of large blocks of land and a ready information base about land history and quality. Of course, the existence of a single large source of land in a given locality may have generated some monopoly rents for the cooperative, but this does not appear to have discouraged potential renters. As noted, in 1992 the use of rental markets was already widespread among commercial farmers, and cooperatives were the most common source of hired land. The Hungarian experience also suggests that, once a basic level of market development is achieved, private farmers will quickly move beyond their traditional role of producing the fragile, labor-intensive crops that large socialist organizations could not produce effectively. By 1994, private farmers in Hungary were challenging cooperatives for the dominance of large-scale farming in grains and industrial crops, posing questions about the likely future role of agricultural production cooperatives in Hungary. As a basic level of market development is achieved and people have become comfortable with market use, private farmers have begun to compete with cooperatives in both land and product markets. The choice between cooperative and individual farming appears increasingly driven by considera-

90 The Evolution of Agrarian Institutions tions of relative productivity. Faced with greater pressure to improve productivity and reduce costs, many cooperatives have responded by restructuring all or part of their production into hierarchically organized, private shareholding

firms. Other cooperatives have liquidated, transferring land to emerging private farms. While our model predicts that such competition would increase returns to smallholders, the actual impact of this competition on the distribution of rural wealth and income cannot be examined with the available data. In the increasingly competitive context, the survival of agricultural production cooperatives as an important form of organization in Hungary depends increasingly on economic performance. In particular, the performance of both worker-members and managers must improve, which will require the cooperatives to develop better governance and incentive mechanisms. To date, however, there is little evidence of such organizational restructuring. Despite the record of strong performance and government and popular support that Hungarian agricultural production cooperatives enjoyed in 1989, it now appears that they may soon disappear from the landscape—a casualty of the combination of market development and organizational inertia.

Comparing the Cases Introduction As shown in the preceding chapters, the transformation of collective agriculture into private farming in East Central Europe has not proceeded quickly or uniformly. Transformation has been slow in many places, and the process has varied widely across countries and across regions within a single country. In chapters 3 and 4, I developed a simple model to explain regional differences in the pace of decollectivization in Bulgaria and Hungary. In both countries regional differences were related to variations in transaction costs related to the degree of market development and in sociohistorical norms regarding the organization of farming. In this chapter, I will draw on the same model to analyze the differences between the two countries. Clearly, these differences are significant. Land has been moved out of collective farms at a much faster rate in Hungary than in Bulgaria. By 1994, only 29 percent of agricultural land (40 percent of arable land) remained in collective production in Hungary, whereas in Bulgaria cooperative farms controlled about 70 percent of agricultural land (HNIS 1995b; BNIS 1994, 223). This is a somewhat paradoxical outcome, in that political forces presiding over the land reform in Hungary were much more sympathetic to some continued role for agricultural cooperatives than were the political forces presiding over the formative period of Bulgarian reform. Differences in the Hungarian and Bulgarian data make it impossible to pool the country-level data and to test the model econometrically as an explanation for the differing levels of decollectivization in the two countries. Instead, I develop a qualitative comparison of the levels of market development and social norms in Hungary and Bulgaria and of the countries’ respective levels of decollectivization. This analysis suggests that the model developed in chapter 2 can also explain much of the difference between the outcomes in the two countries. The different trajectories followed by the two countries would appear to have significant implications for the efficiency of production in the cooperative sector. In Hungary, where agricultural cooperatives compete for land with large private farmers, the cooperatives should face increased pressure to improve returns. In Bulgaria, in contrast, the absence of land markets and competition from private farmers could protect monopsony rents in local cooperatives. These rents could be used to cover high costs or low productivity, as illustrated in figure 2.2. In fact, the structure and behavior of the cooperatives 91

92 The Evolution of Agrarian Institutions evolving in the two countries do appear quite distinct, with Hungarian cooperatives behaving more like typical capitalist enterprises. Still, as will be seen in chapter 6, it is not easy to show that these differences have translated into differences in overall agricultural performance.

Differences in Trajectories In 1989, the agricultural sectors in Bulgaria and Hungary were similar in a

number of ways. Both Bulgaria and Hungary are small, open, agrarian economies that had experienced only limited capitalist development in agriculture before collectivization. In both countries, the majority of land was farmed in collective farms during the socialist period, but during the 1980s the socialist governments in both Hungary and Bulgaria promoted limited private farming as a way of improving resource utilization and food supplies. Finally, both countries have extensive fertile plains regions that, over the last decades, have been dominated by large-scale grain production, but both countries also have significant mountainous and hilly areas in which smaller-scale, more labor-intensive production continued to prevail throughout the socialist period. Despite these similarities, already in 1991 Hungary’s private farming sector was much more developed and market oriented than its Bulgarian counterpart. Private Hungarian agricultural producers farmed relatively small plots, averaging 3 ha, but a relatively large number of households owned some machinery—12 percent owned a rototiller, and about 3 percent owned a tractor. This pattern contrasts sharply with the Bulgarian situation. In 1991, Bulgarian rural households farmed plots averaging only 0.5 ha, one-sixth the size of the average Hungarian plot. While 1.5 percent of rural Bulgarian households owned some form of tractor, 2 percent owned a rototiller (table 5.1). TABLE 5.1. Comparison of Private Farmers in Bulgaria and Hungary, 1991

Bulgaria Hungary

Land farmed (av. ha) 0.5 3.0

Tractor 2.6 Rototiller 1.5 2.0 12.0

Machines owned (% hhs)

Land 3.0 8.0 Labor 0.0 5.0 Machine services 50.0 41.0

Markets used (% hhs)

Credit 0.0 1.0

Share of production for sale 30.0 65.0

Comparing the Cases 93 Many Hungarian households in 1991 already used markets to adjust production inputs and produced for commercial use. Forty-one percent of farming households hired machinery or draft services; 8 percent rented in land, buildings, or machinery; 5 percent hired agricultural labor; and slightly over 1 percent borrowed money for agricultural purposes. Sixty-five percent of Hungarian private production was marketed. In Bulgaria, with the exception of machine services, which were hired by about half of rural Bulgarian house-

holds, the use of markets to adjust inputs was extremely rare. In 1991, no households reported hiring labor or borrowing for agricultural purposes, but 3 percent reported hiring in land. The vast majority of Bulgarian farmers pro-

duced mainly for subsistence. In 1992, only 30 percent of surveyed farm households reported earning any income from agriculture (table 5.1). As noted, after 1991 land was moved out of cooperatives and into private forms of agriculture much faster in Hungary than in Bulgaria. In June 1992, Hungarian cooperatives farmed 48 percent of agricultural land, whereas Bulgarian cooperatives still farmed 70 percent of agricultural land (BNIS 1993, 197). By this point, enough Hungarian land had already moved out of cooperatives to fulfill the government mandate for compensating former landowners. Nonetheless, through 1994 the share of land in Hungarian cooperatives continued to fall, as private producers and private shareholding companies bought and leased increasing amounts of land from cooperatives. By 1994, the cooperatives worked only 29 percent of agricultural land. In Bulgaria, the share of

agricultural land that cooperatives farmed remained essentially unchanged from the 1992 level—about 70 percent (BNIS 1994, 223). As land was restituted to private owners, it moved rapidly from private hands back into cooperatives.

The Hungarian agricultural restructuring is also distinct in that private farmers quickly became a significant force in the production of scale-sensitive grain and industrial crops, entering into direct competition with cooperative farms. In 1995, Hungarian private farmers produced 63 percent of cereals and 56 percent of sunflowers. In Bulgaria, private farmers have continued to restrict themselves to a greater extent to the production of labor-intensive veg-

etables and livestock, producing 43 percent of cereals and 23 percent of sunflowers in 1995. In both countries, private farmers continue the dominance they established in vegetable and livestock production during the pre1989 period (HNIS 1995a, 347; BNIS 1995, 260).

Explaining the Differences The separate analyses of the two cases presented in chapters 3 and 4 suggest two types of explanations for these differences in the outcomes of agricultural

94 The Evolution of Agrarian Institutions restructuring. In both cases, cooperatives persisted in areas where weak market development would create high transaction costs for private producers. Where transaction costs are high, cooperatives may serve as an alternative, nonmarket means of combining resources held by individuals, potentially raising returns above those available in private farming. Data from the two cases also suggest, however, that considerations of relative returns on land and labor may not be the only factor driving land into cooperative production. Social traditions and norms may affect farmers’ knowledge and acceptance of private farming. While evidence of high returns may encourage experimentation with even little known or accepted methods, widespread acceptability may take time to develop. Differences in the levels of market development and social norms in Hungary and Bulgaria are outlined in the sections that follow. Their correlation with the differing outcomes is then evaluated.

Market Development Differences in the levels of market development in Hungary and Bulgaria in the 1990s can be traced back to the period prior to World War II. As was seen in chapter 3, the development of markets for agricultural inputs and production was limited in prewar Bulgaria. While some land and labor were exchanged

through markets, households mainly farmed their own smallholdings with their own labor. A few of the richer households hired in some labor to help farm their larger plots, while the poorest households hired out some labor in order to supplement the meager income from their own plot. In contrast, in prewar Hungary, where both landlessness and extensive estates were common, land and labor markets were quite well developed. Many former serfs rented small subsistence plots from the large estates where they were employed, or they received these plots as payment in kind for their labor. Agrarian capitalists also participated in land markets, renting large estates from the declining feudal families (Kovach 1999). Nearly 50 percent of arable land held by the large estates in the interwar period was rented out, mainly to large capitalist enterprises (Held 1980, 205).

Markets for agricultural outputs also developed differently in the two countries during the prewar period. In Bulgaria, some farmers practiced intensive farming for urban markets or export, focusing especially on garden vegetables, tobacco, or wine grapes (Lampe 1986, 56; Crampton 1987, 71ff.), but most produced for subsistence. Only 14 percent of produced wheat was marketed, 10 percent of corn, 7 percent of potatoes, and 36 percent of cows’ milk (BNIS 1939, 260). While grain covered three-fourths of cultivated land in the 1930s, the vast majority of producers had to buy grain to cover household requirements (Logio 1936, 184-85). Households that did venture into commer-

Comparing the Cases 95 cial farming faced highly monopolized output markets after the 1930s, when the Bulgarian state set up a purchasing monopoly in grains, sugar beets, cotton, tobacco, and other products and established delivery quotas at state-determined prices. This state monopoly continued through World War IT (Lampe 1986, 82) and reduced incentives for expanding commercial production. Subsistence production continued to dominate in Hungary as well, and as late as the 1930s and 1940s an estimated 70 percent of all agricultural production was for self-provision (Gunst 1987). But commercial production had also begun to play a significant role. On the one-third of arable land controlled by large estates, production was primarily for market (Held 1980, 205; Berend and Ranki 1985, 104). In some areas, especially around cities, peasants began to develop market gardening, and those in some more distant areas also began to specialize in commercial products in the early 1900s. Mako, for example, became well known for onion production (Kovach 1999). Still, those who pro-

duced commercially in the first half of the twentieth century were often obliged, as in Bulgaria, to deliver their products to the state at fixed prices. Early differences in the levels of rural market development in Bulgaria and Hungary were magnified during the socialist period. Initially, both countries followed similar paths. Rural households retained access to small plots for private production, but the purchase and sale of agricultural land or machin-

ery by private parties were prohibited, and inputs and utensils for private farming on small household plots were sold in very limited amounts and exclusively by the state. Production by private households was encouraged only

for home use. Hungarian policy toward agriculture changed quickly, however. In 1965, obligatory plan targets for collective agriculture were abolished, and in 1968 price regulation was significantly reduced (Belassa 1985, 265; Volgyes 1980, 387; Fischer and Uren 1973, 75). Sharecropping arrangements developed on many collective farms, giving collective farm members increased control over both the labor process and its products. Still, only about 37 percent of private production was destined for market through the early 1970s (Kovach 1991, 87). In the 1970s and 1980s, the Hungarian government took steps to further expand market relations for small private plots. State prices for private production were raised, and private plot holders were increasingly encouraged to produce for sale to the state or cooperative markets (Cochrane 1993, 81). At the same time, state organizations, such as the local collective farm, were man-

dated to improve the supply of inputs and services to private households through quasi market relations by leasing land and buildings, providing services to interested plot holders, and purchasing their output for the state (Belassa 1985, 277). Households used these emerging quasi markets to expand commercial production. By the mid-1970s, the majority of rural households

96 The Evolution of Agrarian Institutions engaged in some commodity production, marking a historical peak in smallscale commodity production (Juhasz 1982; Kovach 1988). Some 85 percent of rural households produced agricultural goods for sale in 1982 (Boros 1984), and by 1987 income from household plots made up 19 percent of rural household monetary incomes (HNIS 1992). Still, it is important to emphasize that these were market relations of a limited type. Households signed input and sales contracts with state-run monopolies. Private producers faced high and certain demand for their products, but they could do little to expand their operation since they could not purchase additional land or large machinery. In Bulgaria, the majority of agricultural prices continued to be controlled by the state and production quotas for collective farms remained in effect in agriculture until 1989. Household production for cooperative markets was officially discouraged through the 1960s, although the state began to encourage some types of private production for sale to state agencies. Beginning in the mid-1970s, however, the Bulgarian government also began a campaign to encourage small-scale private production for sale to the state and even on cooperative markets (SN 1970, 26; 1971, 5). New shops were to be opened to sell seeds and farming supplies directly to private producers and to rent out agricultural machines. Little was done to implement these provisions, however. In 1985, only about 13 percent of Bulgarian rural households produced any crops for sale to either the state or cooperative markets, while 28 percent produced livestock or livestock products for sale. The vast majority of those producing for sale sold to the state (12 percent of households sold plant products to the state, and 27 percent of households sold livestock); only 6 percent of households produced for cooperative markets (Institute of Sociology 1986). In 1985, income from private agriculture made up only 12 percent of rural household monetary incomes (BNIS 1991), Differences in post-1989 land reform policy have also contributed to different levels of market development in Hungary and Bulgaria in the post-socialist period. In Bulgaria, where prewar landholdings were highly egalitarian, the broad majority of households stood to benefit from restitution of prewar holdings. There was, therefore, broad support for restitution as the means of privatizing land. This support coincided with the desires of the governing anticommunist Union of Democratic Forces to completely dismantle collective

forms of agriculture. The 1991 Ownership and Use of Farm Land Act, amended in April 1992, thus mandated the restitution of all collectivized land to its previous owners or their heirs. At the same time, the law called for all nonland assets of collective farms to be liquidated. Combined, these two requirements were aimed at effectively eliminating the collective farms and forcing the re-creation of the structure of small landholdings that existed before World War II. As illustrated in chapter 3, the ru-

Comparing the Cases 97 ral population and collective farm management often found ways to re-create collective forms of organization (for example, new cooperatives) in spite of this legislation, but the law did succeed in greatly fragmenting the ownership of land and agricultural capital. With landownership fragmented into plots averaging 8 ha and held by individuals with little information about agricultural markets, the transaction costs involved in renting a large, consolidated plot of land suitable for commercial farming were inevitably high. In Hungary, in contrast, the land reform left large blocks of land concentrated in the hands of the collective farms, which were simply transformed into shareholding cooperatives. Prewar holdings, which were highly unequal, did not have the broad legitimacy that they had Bulgaria. At the same time, the collective farm sector had produced impressive economic results in the 1980s, and few groups other than the reestablished Smallholders Party! sought to dismantle it completely. The Compensation Law, which guided the restructuring of the collective agricultural sector, therefore sought to compensate those hurt by collectivization without reestablishing the prewar landholding situation. About 40 percent of arable land held by the collective farms was to be set aside for compensation (Agnocs and Agnocs 1994), while the rest would remain the property of the cooperatives. The majority of nonland collective farm assets also became cooperative property. Both land and assets were thus left in large blocks, facilitating purchases and rentals by private individuals and the development of land markets. This, of course, also gave local cooperatives a certain degree of market power. But many cooperatives also faced heavy debt burdens and liquidity problems in the early years, which reduced their ability to hold out for excessively high prices. So, taken together, both history and current policy have contributed to a higher level of development of agricultural markets in Hungary than they have in Bulgaria. In the case of land markets, rural Hungarians have a long tradition of using markets to adjust landholdings. This was true both in the prewar period and under collectivization, when households could contract with cooperatives for land in exchange for a share of production. Bulgaria had less widespread experience with land markets, both in the prewar period and under central planning. Compounding these differences are the distinct structures of the two land reforms. In Hungary, cooperatives continued to own large blocks of land, which served as a clearly visible source of large, contiguous parcels of agricultural land.” In Bulgaria, in contrast, setting up a viable farm after restitution often required negotiating with a large number of owners, a time-consuming process that might easily fail, given people’s discomfort with and lack of information about market transactions in land. The impact of both history and current policy is reflected in the distinct levels of land market development in the two countries, as shown in table 5.1.

98 The Evolution of Agrarian Institutions Like land markets, other agricultural markets also appear to have developed more quickly in Hungary than they did in Bulgaria. As illustrated in table 5.1, in 1991 Hungarian farmers were much more likely than their Bulgarian counterparts to use market transactions to acquire labor, machines, or other inputs needed for farming. By 1994, Bulgarian farmers had surpassed the 1991 Hungarian levels of market use in agricultural labor and machinery services

but not in credit, land, and buildings. While the 1994 Hungarian data is biased upward by its focus on commercial farmers, it suggests significant continued growth in Hungarian labor and machine service markets between 1992 and 1994 (table 4.2).

Agricultural input markets were thus significantly more developed in Hungary than they were in Bulgaria. These markets reduced the transaction costs involved in private farming (at least in crops with important economies of scale) and allowed more Hungarian private farmers to enter large-scale commercial farming. But there is also some evidence to suggest that Hungarian private farmers had less need than did their Bulgarian counterparts to rely on markets in order to form a viable farm. One reason for this lies, again, in the nature of the two land reform laws. Whereas in Bulgaria the majority of households received some land purely on the basis of historical rights and regardless of whether they were willing or able to farm it, in Hungary land had to be acquired by conscious choice, at auction, by spending coupons that could have been used for other purposes. Of course, some Hungarians still acquired land that they were unable or unwilling to farm (Swain 1997). But this was not as extensive a problem as it was in Bulgaria. As a result, fewer Hungarians needed to adjust landholdings after the land reform, and any underdevelopment of land markets would play less of a role in households’ choice of how to use their land.

A second significant difference in households’ exposure to transaction costs results from the distinct rural demographics of the two countries. Hungary became known in the 1970s for its underurbanization, that is, for the fact that rural residents commuted rather than migrated to urban jobs (Szelenyi and Konrad 1974). With less rural-to-urban migration by the working-age population, rural demographics remained more balanced. In the early 1980s, 67 percent of the Hungarian rural population was under fifty years of age. Within the agricultural labor force, relative youth also predominated: 80 percent of full-time agricultural employees were under fifty years of age, while another 30 percent were under thirty years (Swain 1987, 27). In Bulgaria, where rural out-migration was often a prerequisite for improving job prospects, only 58 percent of rural dwellers were under fifty years of age in 1987 and the fulltime agricultural labor force was even older—only 43 percent were under fifty years (BNIS 1988b, 38, 120). The Hungarian rural population was also much

Comparing the Cases 99 better educated than was its Bulgarian counterpart. Sixteen percent of rural Hungarians aged eighteen years and older had completed a secondary education in 1991, while only 2 percent of rural Bulgarians had completed such a degree in 1987 (HNIS 1992, 7, 8; BNIS 1988b, 773). Rural Hungarians, and es-

pecially those with agricultural experience, were more likely than rural Bulgarians to be able to farm their own land and to do so as a commercial endeavor. As a result, they would have less need to turn to markets to reallocate their landholdings or to hire in labor to help them farm it.

Historical Traditions and Social Norms While differences in the degree of market development can affect the transaction costs involved in organizing private farming and thus the emergence of this institution, households’ decisions about organizational form may also be influenced by other factors. Rather than choosing among a set of theoretically feasible forms of production, households may simply follow historical traditions or adhere to social norms. The history of agricultural organization and past and present social norms pertaining to agriculture differ significantly between the two countries, and these differences may help to explain the distinct outcomes of the Hungarian and Bulgarian transformation processes.

Despite the limited development of prewar agriculture, Hungary had much stronger traditions of private commercial agriculture and the use of markets to allocate agricultural resources than did Bulgaria. As we have seen, prior to World War II Bulgaria was a country of quintessential peasant production. Sixty-nine percent of landholdings were under 5 ha in 1946 (Meurs, Kouzhouharova, and Stoyanova 1999), and the fragmented holdings complicated attempts at modernization. Small farmers produced mainly for subsistence. Under these conditions, private agriculture did not offer a viable path to economic improvement. Instead, agriculture was seen mainly as an extension of the household economy. Private commercial farming had a much stronger prewar history in Hungary. Both relatively rich middle-peasant and large capitalist farms increasingly specialized and intensified their production over the prewar period. The number of market-oriented peasants remained small, but this group provided evidence that commercial production could offer an acceptable path to upward social mobility, even to the peasantry (Kovach 1999). In both countries, rural populations also had extensive prewar exposure to cooperative organization, but these experiences were again quite distinct. In Bulgaria, starting in the 1900s rural cooperatives were supported by a wide range of political parties and by the state as a means of modernizing agriculture on the fragmented smallholdings. While initially resisted by the peasantry,

100 The Evolution of Agrarian Institutions the cooperatives provided much needed credit and services to the impoverished countryside and spread quickly. By 1939, cooperatives serviced about one-third of the economically active population in the country. Credit cooperatives accounted for 76 percent of all rural cooperatives, but these also sold villagers industrial goods and served as purchasing points for agricultural production. Some also processed the agricultural goods—especially tobacco, wine, milk, sugar, fruits, and vegetables—and a growing number of cooperatives experimented with collective agricultural production (Meurs, Kouzhouharova, and Stoyanova 1999). Cooperative membership became a way of life for smallholders. Whereas smallholder agriculture alone could offer private producers little hope of modernizing or raising incomes, cooperatives became accepted as a means toward achieving these goals, by providing peasant farmers with access to essential credit and machinery.

As in Bulgaria, agricultural cooperatives figured importantly in pre-World War II Hungary. By World War II there were over 2,000 credit cooperatives and another 2,000 or so consumer cooperatives serving Hungarian villages. Cooperatives were also formed to process and distribute agricultural goods. The nature of these cooperatives was quite distinct from those in Bulgaria, however. Hungarian agricultural cooperatives were often controlled by modernizing large landowners, who used them as political organizations to promote legislation favorable to their interests (UHCS 1934). Hungarian cooperatives, therefore, did not represent an important means of improving the welfare of small producers. For such improvements, peasants instead looked to the example of the upwardly mobile, entrepreneurial middle peasantry. Over the socialist period, the Hungarian and Bulgarian experiences with

collective forms of agriculture continued their distinct trajectories. In Bulgaria, despite strong, and even violent, resistance to collectivization in some areas, many households, both rich and poor, supported the development of collective farms as a means of consolidating land and modernizing agricultural production (Life History Interviews 1992; BSD 1992). Within a decade, collective farms completely dominated Bulgarian agriculture, and in 1989, 86

percent of total agricultural land was still in either state or collective farms (BNIS 1992). While the rural population was, of course, not uniformly satisfied with this situation, the collective farms were widely recognized by vil-

lagers as a source of agricultural modernization and improvements in living standards (Creed 1998, chap. 2; Meurs, Kouzhouharova, and Stoyanova 1999). As we have seen, Bulgarian collective agriculture was subject to tight control by the state throughout the socialist period. “Private” farming was, as in the prewar period, mainly small-scale, subsistence production. Neither sector promoted the development of entrepreneurial skills or independent sources of household income.

Comparing the Cases 101 In Hungary, a much stronger culture of private and independent farming persisted during the socialist period. The Hungarian Communist Party faced fierce resistance to collectivization and was only able to complete it in 1960, when 49 percent of agricultural land was collectivized. Even then, significant compromises had to be made toward private farming. Extensive use of sharecropping arrangements on collective farms permitted significant private control of both agricultural production and its products (Kovach 1988). On collective farms, planners permitted a great deal of organizational and productive independence. By the 1970s, substantial amounts of household production were oriented for sale to state firms or in farmers’ markets, financing rapid improvements in rural living standards and confirming the prewar experience of upward mobility through limited commercial farming (Kovach 1999). In both the prewar and socialist periods, rural Hungarians thus have had much more extensive experience with, and have seen more positive po-

tential in, private and independent agriculture than have their Bulgarian counterparts. This difference in production traditions has its counterpart in distinct rural political norms. In the prewar period, the dominant Hungarian rural political force, the Smallholders Party, focused on the problems of the powerful large producers and promoted a limited land reform that would benefit the more prosperous medium farmers. No established alternative organization existed to promote the interests of the small peasantry. The Communist Party, which refused to accept the Hungarian peasants’ vision of small, independent production, failed to win acceptance even among the poorest peasants. In Bulgaria, where no class of powerful, large landholders existed, the most important rural political voice was the populist BANU party. Alexander Stamboliiski, the BANU leader in the first part of the century, advocated the expansion of the system of rural cooperatives along the lines of the German Raiffeisen model (Lampe 1986, 29-30). This program became so widely accepted in rural areas that the peasant-based BANU was able to form a government in 1919, despite opposition from powerful urban forces. Although this program did not emphasize collective agricultural production, support for BANU did represent the widespread acceptance of cooperatives as a means of solving economic problems of smallholders. In the post-1989 period, the BSP has continued to promote collective agricultural production. The BSP retained strong support in much of the countryside through the early 1990s (Stokes 1993, 177; Troxel 1993, 409-15), representing ongoing rural acceptance of cooperatives as a means of organizing agricultural activity. In Hungary, in contrast, the Communist Party led the move to greatly expand private agriculture in the 1980s, promoting large-scale private farming

102 The Evolution of Agrarian Institutions through the leasing of cooperative or state property to private individuals, especially those with good connections to local rural officials. The Hungarian Socialist Party (HSP, the reformed Hungarian Communist Party) continued to support this policy in the early 1990s, such that many of the leading new private farmers (the so-called Green Barons) were also members or former members of the HSP. Certainly, some members of the rural population did continue to associate the HSP with the development of successful collective farms in the 1970s and 1980s and the collectives’ support for the expanding private farms. Still, over the course of the transformation, the relationship between the HSP and collective forms of agriculture became ambiguous. Electoral support for the HSP in the countryside was not synonymous with a belief in collective forms of agriculture. In any case, the majority of rural dwellers did not support the HSP, whose

support came more from intellectuals and party leaders. In the election of 1990, only 29 percent of villages supported the HSP, while 57 percent supported the anticollective Smallholders Party (Mathijs 1997, 253). In both 1990 and 1994, voting for the HSP was negatively correlated with being a farmworker but positively correlated with having an education at least through secondary school (Fodor, Hanley, and Szelenyi 1997, 217). This is in sharp con-

trast to Bulgaria, where support for the Socialist Party continues to reflect collectivist values of villagers and rural voters continue their strong support for this collectivist model. Taken as a whole, historical and contemporary rural norms appear much more supportive of private agriculture in Hungary than they do in Bulgaria. Historically, the Bulgarian rural population has very limited experience with private agriculture as an acceptable path to economic success and a long and continuing history of supporting collective solutions to agricultural organization. Private farming may not immediately appeal to households as a solution to rural problems. The Hungarian historical experience has left rural dwellers with a much more prominent and positive image of private agriculture. While the Hungarian collective farm came to be accepted as a successful method of organizing agriculture in the 1970s and 1980s, this was always in the context of coexistence with a second successful and more traditional form—private production. Currently, the majority of rural voters support the Smallholders Party, which has consistently promoted the dissolution of collective forms of production. Choosing private production is likely to involve less perceived risk and fewer social costs in Hungary than it is in Bulgaria. Regardless of whether transaction costs or social norms underlie households’ reluctance to adopt private farming, increased profit margins in agriculture are likely to contribute to its expansion. If high transaction costs are slowing the spread of private farming, higher profit margins may nonetheless

Comparing the Cases 103 allow some innovators to experiment with this form of production and still remain viable. As more experimentation proceeds and as markets develop to serve the innovators, transaction costs should gradually fall, prompting further expansion. If it is social norms that inhibit experimentation with private farming, higher profit margins will send a stronger signal about the potential of the new form and serve to compensate households for economic or social risk associated with the experimentation. In both Hungary and Bulgaria, however, profit margins in agriculture have been severely undermined by the transition period. With demand falling and input prices adjusting upward toward world levels, agricultural producers have been caught in a price scissors. This gap has been significantly larger in Bulgaria. In Hungary, from 1990 to 1994, the increase in procurement prices for agricultural products was 86 percent of the increase in industrial producer prices (HNIS 1995a, 300, 306). In Bulgaria, procurement prices in agriculture increased even more slowly over this period, only 68 percent of the increase in industrial producer prices (BNIS 1995, 124-25). The greater profit squeeze

and pressure on agriculture in Bulgaria left potential Bulgarian innovators with less of a margin to absorb the risk, transaction costs, and possible social approbation that might have accompanied innovation. This may also have contributed to the slower pace of the adoption of private farming in Bulgaria.

Evaluation and Discussion The economic considerations and social norms outlined in this chapter describe in detail a complex of factors influencing a household’s choice to allocate land to collective or private farming, as described in chapter 2 and illustrated in figure 2.1. Table 5.2 summarizes the differences in these factors between the two countries. As can be seen, Hungary has provided a more pos-

itive context for private farming with respect to all but one or two factors, which contributes to the significant difference in the pace of decollectivization of agriculture in the two countries. History and policy have combined to put Bulgaria and Hungary on different reform tracks by affecting both the level of market development and the sociopolitical context in which households make

decisions about the use of agricultural assets. Market development has occurred much more quickly in Hungary, lowering transaction costs for private farmers, and social and political norms have been much more supportive of private farming. This has resulted in differences in the speed of restructuring. But it has also affected the nature of the emerging private and cooperative farms and the relationship between the two sectors. In Hungary, large private farmers already

104 The Evolution of Agrarian Institutions TABLE 5.2. A Simple Model of Cooperative Persistence in Bulgaria and Hungary

Bulgaria Hungary

Land No Yes Labor No Yes Credit No Yes Machine Yes Output ¢Yes g

Market development

Social norms

History of private agriculture No Yes

History of coops Yes Yes/No Rural support for private agriculture No Yes

Economic context No Yes

compete with cooperatives for land (having taken control of 70 percent of agricultural land in 1994) and in output markets (where they produce 63 percent of the grain crops in which cooperatives specialize). In the face of this competition, and surrounded by fairly well-developed input and output markets, many Hungarian cooperatives have begun to behave more like capitalist businesses than like either socialist collective farms or typical producer cooperatives. The majority (79 percent) of cooperatives had reorganized as holding cooperatives by 1994 (HNIS 1994a, 176), organizing operations into a number of separate limited liability companies (LLCs) along distinct product lines. Some holding cooperatives also contained, as subunits, agricultural producer cooperatives, in which members retained direct control of management, but these usually controlled a minority of cooperative assets. The LLCs are usually run by middle-aged technocrats who previously managed the collective farms. In the LLCs, these managers have a high degree of

autonomy from the holding cooperative and its members; they have independent budgets and can succeed or fail independently of other parts of the holding cooperative. Members of the holding cooperative do continue to exercise some control over the LLCs, since the holding cooperative must approve loan requests and other key decisions, but this control is very indirect and limited to major economic decisions. To a large extent, LLC managers are free to run their companies like typical private firms (Kovacs 1996). The Hungarian holding cooperatives themselves have also moved away from cooperative organizational principles. Members of the cooperatives hold

shares on which they earn returns, but they do not all participate in the organization with either land or labor. Passive members, who do not work in the cooperative, have no voting rights in the cooperative but may sell their shares. Since the shares are of minimal economic value, however, members cannot

Comparing the Cases 105 easily withdraw their shares from the cooperative if they are unhappy with cooperative policy. The shares of active members, who do work in the cooperative, are not negotiable, but these members have voting rights. Still, conflicts of interest among members and other internal divisions often leave management in a powerful position (Kovacs 1996). So while cooperative management must offer competitive returns to those leasing land to the cooperative, they are under limited pressure to please members. Like LLC directors, they are often free to implement their own agenda. Many of the current LLC managers hope to complete the transformation

of the cooperatives into typical capitalist shareholding firms over the next years, first buying out a majority of shares held by other members and then voting for the transformation (Kovacs 1996; Interview with Cooperative President 1997). Many members are expected to sell out due to low returns, frustrations with cooperative policy, and the lack of management accountability to members. If this happens, the majority of the remaining Hungarian agricultural cooperatives will become capitalist shareholding firms, with mixed insider and outsider ownership, over the next decade. In Bulgaria, in contrast, private farmers did not yet compete actively with cooperatives for land in 1994 (private farmers controlled only 30 percent of agricultural land, mainly held in small, individually owned parcels). Few private farmers competed with cooperatives in grain markets, either, and cooperatives continued to produce 67 percent of grain. Organizationally, the co-

operatives continued to resemble typical producer cooperatives or even socialist collective farms to a greater extent than those in Hungary. Membership was based on participation with land (and sometimes also with labor), and in 1994 most cooperatives continued to be organized as a single, integrated production unit under the control of central management and the cooperative General Assembly. Still, like their Hungarian counterparts, Bulgarian cooperative members

exercised little control over cooperative management. Only 42 percent of members surveyed in 1995 even bothered to attend the meeting of the General Assembly, and surveys indicate that membership rarely reprimanded management for poor performance (ABBC 1996). Cooperative management thus faced little pressure to increase returns on land or to otherwise defend member interests. Perhaps because of the lack of competition from capitalist producers, or due to the general lack of market development and poor economic prospects in agriculture, Bulgarian cooperative managers have to date shown little interest in transforming the cooperatives into capitalist farms under their own control. The Bulgarian cooperatives, therefore, appear likely to persist over a much longer period. Cooperatives’ persistence may be further aided if the cooperatives can turn their early advantages into a cycle of posi-

106 The Evolution of Agrarian Institutions tive feedbacks. They might do this through the creation of economic networks that continue to reduce transaction costs below those faced by private farmers, even as markets develop and deepen. A cycle of positive feedback is also possible if cooperatives can use their head start to develop structures of democratic governance and incentives like those outlined in chapter 2. Properly governed, cooperatives may offer a variety of productivity advantages over traditional employment relations, making them competitive with the emerging private farms. The trajectories of agricultural transformation are thus very different in Hungary and Bulgaria and are likely to continue to be so in the foreseeable future. The discussion in chapter 2 suggests that these differences will translate into differences in agricultural performance. As will be seen in the next, and concluding, chapter, it is difficult to determine without further empirical study whether such differences do in fact exist. Still, the analysis and empirical work presented here suggest a number of policy interventions that might be effective in improving agricultural performance in the two cases, and these will also be examined in chapter 6.

Conclusions Our examination of the changing agricultural organization in Hungary and Bulgaria generates conclusions that address three broad questions: First, what drove the distinct patterns of change in Hungary and Bulgaria, and what light does this shed on our understanding of institutional and organizational change in general? Second, what is the likely economic impact of the distinct paths of reform? And third, what policy interventions may help to improve the economic outcomes generated by agricultural restructuring? Conclusions related to these three questions will be examined in turn.

Theory Revisited To review the analytical insights generated by the two cases, it is helpful to return to figure 2.1. The clearest finding from the empirical work presented here is that decisions about land allocation were influenced by both economic incentives (relative transaction costs) and social factors. In areas where transaction costs were likely to be higher in private farming, land was consistently more likely to be placed in cooperatives. In areas where dominant social norms

appeared inhospitable to private farming, cooperative farming was also significantly more likely to persist. But the two East Central European cases examined here also suggest that the impact of social norms can be short lived. Market development was consistently the more important factor in the emergence of private farming, continuing to influence outcomes over the whole period and having the larger im-

pact in 1992. While differing social norms played a significant role in the uneven development of private farming across regions in 1992, by 1994 none of the social variables included in this analysis played a significant role in explaining variations within either country. Here we see evidence of the feedback loop depicted by the dotted lines in figure 2.1. Market-based economic reform and privatization that continued between 1992 and 1994 may have begun a process of changing norms. As private production became more economically viable, more households may have begun to experiment with it. For those still holding onto the old norms, the increasing numbers of households experimenting with private farming would increase the cost of enforcing their norms. These would then become less important to organizational outcomes. Of course, there is a significant literature documenting the resistance of 107

108 The Evolution of Agrarian Institutions norms to change and the role of norms in blocking changes in other institutions, even in the face of apparent economic incentives for such change (North 1990; Elster 1989). Social scientists understand little about the conditions under which norms do or do not change in the face of economic incentives. Still, the rapid decline of the impact of norms on land allocation in Hungary and Bulgaria suggests that the apparent cases of norms persisting in the face of eco-

nomic incentives for change might benefit from further analysis. There may be underlying economic reasons for the lack of change in norms, which have until now escaped attention. For example, in Hungary, where developing markets appear to have eliminated the impact of transaction costs on land allocation decisions by 1994, cooperatives persisted in many areas. Case studies of specific persisting cooperatives suggest that households continued to participate in cooperatives to gain access to other assets, such as fruit storage or wineprocessing facilities, that households could not access in other ways (Kovacs

1996). These external benefits of cooperative membership might make it worthwhile for households to allocate land to cooperatives even when they offered slightly lower returns on land than did private farming. The findings from the Bulgarian and Hungarian cases also suggest some additional insights into the relationship between transaction costs and market development depicted in figure 2.1. First, the Hungarian experience suggests that fairly limited market development may be enough to reduce trans-

action costs to a level that makes private farming competitive with cooperatives. In 1991, only 8 percent of private farmers used markets to reallocate land, 5 percent used markets for labor, and 1 percent used credit markets. Still, by 1992 a small class of private commercial farmers had begun to emerge, and this group expanded to control over 70 percent of arable land by 1994 (HNIS 1995a). These private farms now compete actively with cooperatives for land, even in the grain regions, where economies of scale make large, capital-intensive farms necessary. Second, the Hungarian experience suggests that the relationship between market development and the emergence of property rights should be reconsidered. Although much of the literature on privatization and transition has emphasized the need to establish property rights in order to promote the development of markets (see Rapaczynski 1996 for a critical theoretical discussion of this assumption), the Hungarian case suggests that under the right conditions the development of markets can play an important role in establishing property rights. In Hungary, about half of arable land continued to be held as collective property by transformed collective farms after the governmentmandated land reform was completed. This centralization of resources appears to have reduced the transaction costs involved in the exchange and to have facilitated the development of land markets. In 1992, 46 percent of com-

Conclusions 109 mercial farmers leased land in large parcels (an average of 68.8 ha) and threequarters of this land came from cooperatives and state farms. This land market led to significant increases in privately held land by 1994. Cooperatives sold off significant amounts of land, and private holders became the main source of leased land, supplying 51 percent and leasing mainly to other private farmers. Clearly, once households began to allocate land to private farming, this also contributed to the development of markets, as more of the new produc-

ers used markets rather than old institutional connections to acquire resources. Thus, the line of causality between market development and privatization is represented by both the solid and dotted lines in figure 2.1. By 1994, neither transaction costs nor social norms could explain differences in the persistence of cooperatives across regions of Hungary, and the model established in chapters 3 and 4 could explain only 46 percent of the differences across regions of Bulgaria (down from 62 percent in 1992). Clearly, other factors have become increasingly important and would ideally be incorporated into our analysis. One possible explanation, growing out of the theoretical framework developed in chapter 2, is the differences in production costs. It is possible that there are some systematic differences in production costs between cooperative and private farms that varied across regions, perhaps increasingly so over the period 1992-94. These might have to do with the efficiency of management and governance structures, with production technology, or with product specialization. To test whether differences in produc-

tion costs are driving decisions about cooperative versus private farming, farm-level productivity data would be needed. Unfortunately, this information is not yet available for the two countries examined here. Recent work on the Czech Republic, however, suggests that cooperatives do indeed have higher total factor productivity than private farms, due to scale economies, higher capital intensity, and lower transaction costs (Hughes 1998). Another possible explanation for cooperative persistence is the ability of cooperatives to produce positive externalities for members, such as the access to fruit storage or wine-processing machinery described earlier, that individual farmers could not afford to purchase on their own. Testing this theory must also be left for future work.

Does the Outcome Matter? The empirical evidence presented in chapters 3 through 5 has suggested that where cooperatives persist they do so, in part, because they reduce transaction costs and thus increase potential returns to asset holders. Still, the high transaction costs faced by private farmers put cooperatives in a position to act as a

110 The Evolution of Agrarian Institutions local monopsony—leasing to or integrating into cooperatives provides one of very few opportunities for households to productively employ all their land. As suggested in figure 2.2, cooperatives in such a position may have little motivation to pay landowners a fair return on their land, to improve productive efficiency, or to expand production. Without such motivation, agricultural performance may be weakened and income distribution may be skewed away

from small landholders and toward cooperative managers. , Is there evidence that these problems are occurring? An answer to this question can only be very preliminary. The kind of farm-level data necessary for a careful econometric study of the impact of privatization on agricultural performance is not yet available for the countries studied here. But some initial conclusions can be drawn by examining aggregate data in two ways. First, because Hungary has a significant number of large private farmers who compete actively with cooperatives for land, Hungarian cooperative farms should be forced to seek higher productivity and to pass on some of these increased returns to landholders, approximating point B in figure 2.2. The Bulgarian situation, in which cooperatives face very limited competition for land, would more closely approximate point A. We would expect agricultural performance in Hungary to be better than that in Bulgaria and returns to landholders to be higher. Simply comparing yields between the two countries will not allow us to compare the impact of the two transitions on performance, however, because agricultural yields were significantly higher in Hungary than in Bulgaria prior to 1989. If we compare yields in some important crops common to both countries, we see that Hungarian wheat yields were 116 percent of Bulgarian levels for the period 1986-90, while sunflower yields were 112 percent and tomato yields were 111 percent (HNIS 1992, 1995a; BNIS 1991, 1995). Comparing changes in the performance of the two countries since 1989 will provide a better indication of the impact of the reform path. In both countries, yields fell during the period 1990-93 due to drastic declines in input applications and to organizational disruptions. In both countries, yields in most crops began to recover in 1994. But there are important differences between the changes in performance in the two countries. In Hungary, average wheat yields over the period 1991-94 were only 86 percent of average levels during the period 1986—90. Sunflower yields were 89 percent of previous levels, and tomato yields were 62 percent. In Bulgaria, in grain crops, which continued to be dominated by cooperatives, yields fell more than they did in Hungary, as expected. Wheat levels fell to 76 percent of pre1989 levels, while sunflower yields fell to 75 percent. In vegetables, where private Bulgarian farmers dominated and competed directly with cooperatives, yields fell less than they did in Hungary—tomato yields fell to 84 percent of

Conclusions 111 previous levels. By 1994, grain productivity in Hungary began to recover, with wheat production achieving 99 percent of pre-1989 levels. In Bulgaria, in contrast, wheat productivity continued to fall, reaching 68 percent of the 1986-89 average. Other grain products began to recover, but less slowly than they did in Hungary. Sunflowers achieved 75 percent of pre-1989 levels, compared to 79 percent in Hungary. Vegetable yields also continued to fall in Bulgaria, while those in Hungary began to recover (HNIS 1989, 1992, 1995; BNIS 1991, 1995). Agriculture thus does appear to have performed less well in Bulgaria overall, and the most significant differences lie in the grain crops that continue to be dominated by (monopsonistic) cooperatives.

Some additional evidence about performance can be gleaned by comparing the performance of private and cooperative sectors in each country. In Hungary, the increasing pressure from new private farmers does appear to have spurred productivity improvements in the cooperative sector. In 1992, cooperatives had average yields just slightly above those of the private sector in grains, whereas their yields in vegetables were well below those for the private sector. AS competition from private farmers increased through 1994, cooperatives significantly raised vegetable yields. While grain yields remained on a par with those of private farmers, vegetable yields were well above those of private competitors (reaching 128 percent of the average for the sector as a whole for tomatoes and 115 percent for peppers) (HNIS 1995a). In Bulgaria, where cooperatives did not face significant competition from

private farmers, the cooperative sector performed relatively worse. In both 1992 and 1994, the private sector producers outperformed cooperatives in both grain and vegetable production. But despite the fact that the low yields of Bulgarian cooperatives were already surpassed by those of the fledgling private sector, land remained in the cooperatives (BNIS 1995).

This very preliminary evidence thus suggests that the distinct paths of agricultural restructuring have had a significant impact on agricultural performance. In Hungary, where markets are better developed and cooperatives have faced more competition from private farmers, cooperatives have raised productivity and the agricultural sector as whole has recovered more quickly than they have in Bulgaria, where cooperatives face much less competition for land from private farmers.

Unfortunately, data on rents paid to smallholders by cooperatives and private farmers are not yet available, so we do not know whether competition for land between cooperatives and new private farmers has forced up rents paid to the often poor and elderly smallholders. Due to data limitations and the slow pace of the Bulgarian reform, I was also unable to examine the impact of emerging land markets on the overall concentration of landownership in either country. There is some evidence from Hungary that land concentra-

112 The Evolution of Agrarian Institutions tion increased among commercial farms from 1992 to 1995, as the share of land

farmed by very small producers (under 1 ha) fell from 51 percent to 28 percent and as the share of land held in farms of more than 21 ha rose from 7 percent to 21 percent (Harcsa 1995, 6). Sixty-eight percent of very small commercial farms producing in 1992 had gone out of business by 1995. This is a significant increase in the concentration of land use, but it tells us nothing about changing wealth or income distribution. The majority of the defunct farms were part-time livestock producers, many of whom were losing money in livestock production. Some may have found other, higher-return uses for their time. Others may have found that they could earn more from their land by leasing it to another farmer as rents were bid up. A more complete examination of the impact of land market development on rural income distribution in East Central Europe will be an important topic for future research.

The China Example Reconsidered It is important to note that agriculture has not performed particularly well in either Hungary or Bulgaria. For the period 1996-98, after almost a decade of reorganization and market development, agricultural productivity in Hungary was still only about 71 percent of its level during the period 1979-81. In Bulgaria, productivity was only 69 percent of the previous level (www .worldbank.org). In addition to the high transaction costs that private farmers face, the sector must struggle against a host of macroeconomic problems. Macroeconomic instability has a particularly adverse effect on credit market functioning in a sector like agriculture, which has a long production cycle and considerable levels of risk and uncertainty. At the same time, collapsing aggregate demand has depressed food prices, as has the rapid opening of trade with countries that more highly subsidize their agricultural sectors. These factors have undermined investment in agriculture and forced farms to radically reduce inputs such as fertilizer and irrigation, regardless of organizational form. Herein lies an important distinction in the Chinese experience. In China, households were able to shift quickly to private production because transaction costs were restrained by both state policy and the limited economies of scale in one dominant crop—rice. But agricultural performance in China has not only benefitted from smooth organizational change. Agricultural performance is also supported by the strong demand fueled by China’s booming small industrial and construction sectors, by state-financed investments in the fertilizer industry, and by continued protection from competing foreign imports. These factors contribute to high profit margins, high investment levels, and rapid productivity growth.

Conclusions 113 Policy Recommendations These conclusions generate a number of policy implications. Perhaps the most important implication is that, when it comes to agricultural restructuring, one size does not fit all. Mirroring the flawed logic of collectivization, which extended collective farms to all of agricultural production regardless of product type, local physical geography, or local traditions, early agricultural reform policy in transition economies often sought to impose small-scale private agriculture as the only acceptable new form of production. Political forces advocating such a position existed in both Hungary and Bulgaria and in many other transition economies (Meurs 1999). What the analysis presented here suggests, however, is that local variations in market development, product specializa-

tion, and social norms create distinct allocative problems that can best be solved by distinct, locally appropriate organizational forms. Specifically, cooperatives may provide an important alternative to private farming where weak market development prevents adequate resource adjustment by private farmers. In this situation, attempts to legislate cooperative farms out of existence and to impose a single model of private production would only serve to further weaken agricultural performance. While the cooperatives might not achieve a theoretically optimal level of efficiency (that associated with the “nirvana approach” discussed in chapter 2), they may offer the best possible outcome, given the context of weakly developed markets. We have also seen, however, that cooperatives may have little incentive to improve their own performance in such a context. Both productive efficiency and returns to landholders may fall below their potential without pressures from competing producers or active, empowered members. Currently, most cooperatives do not have strong cooperative governance mechanisms through which members could hold management accountable. Instead, management enjoys a large degree of autonomy from an institutionally weak and inactive membership. A second policy implication of my analysis is thus that policymakers could improve agricultural performance by assisting cooperatives in developing modern governance and management techniques. This could be done both by amending legislation governing cooperatives and by providing training for members. A number of international cooperative organizations exist that could provide assistance in such training and institutional development. The Caja Laboral Popular of the Mondragon Group of cooperatives in Spain and the International Cooperative Alliance would be two examples of such organizations. The analysis presented here, particularly of the Hungarian experience, also highlights the importance of a vibrant private sector in improving both cooperative performance and agriculture as a whole and emphasizes the cen-

114 The Evolution of Agrarian Institutions tral role of transaction costs in private sector development. Levels of market development were too limited at the time of this survey to test which markets (those for land, labor, or credit) created the most significant transaction costs barriers to private farmers. But field observations suggest that labor markets were among the least-binding constraints. Policymakers can address transaction costs faced by private farmers in other markets in a number of fairly simple ways, some of which were already discussed in chapter 2. As suggested by the comparison of the Hungarian and Bulgarian experiences, transaction costs in land markets can be reduced by initially choosing a land reform policy that legalizes transfers but does not start by fragmenting land. Where land reform structures have resulted in very dispersed ownership, as in Bulgaria, it may be possible to reduce transaction costs through the development of land exchanges. Like the municipal labor exchange offices that already exist in Bulgaria, local land exchanges could provide a centralized location for buyers and sellers to meet, could centralize information about land prices, and could provide standardized contracts for leasing parties. Other means of reducing transaction costs in land markets include speeding up the titling process, which continues to lag in Bulgaria, and facilitating recordation (Wunderlich 1995), Transaction costs in credit markets would also be reduced by speeding up the titling of land. Further reductions would result from the decentralization of bank branches to provide broader access and greater use of locally available information about borrowers and from the approval of legislation regulating noncommercial lending institutions such as credit cooperatives and rotating credit schemes. Both Hungary and Bulgaria had highly developed systems of credit cooperatives prior to World War II, but the system has not reemerged in either country since 1989, in part due to the lack of facilitating legislation. A fourth policy consideration highlighted by this analysis is the importance of the recovery of agricultural prices for the promotion of organizational change and the improvement of agricultural performance. Currently, export taxes and bans restrict exports of some crops and depress domestic prices, especially in Bulgaria, and this dynamic is exacerbated by falling domestic food demand associated with high unemployment. With agricultural prices so low, rural households may feel unable to experiment with new forms of agricultural organization, which may have high or uncertain initial transaction costs. If agricultural prices rise, however, the wider profit margin may allow households to take greater risks or to absorb higher transaction costs during the initial formation of their farm. Strict prosecution of price fixing by input monopolies and distribution monopsonies could also help widen profit margins of private farmers and thus promote experimentation. Wider profit margins

Conclusions 115 should encourage higher levels of investment in agriculture and more appropriate levels of input use (Meurs and Morrissey 1997). The Hungarian experience suggests that, given a basic level of market development, private farmers may quickly expand from their traditional role as producers of the fragile crops that large socialist organizations cannot produce effectively. Private farmers may begin to challenge cooperatives for the dominance of large-scale farming. This need not lead to the complete privatization of agricultural production, but it will help promote increased efficiency in the transforming cooperatives and the agricultural sector as a whole. As noted in chapter 2, market development is far from being a silver bullet for the efficiency and distributional problems in East Central European agriculture. Market development may help to reduce transaction costs and encourage the entry of private farmers into commercial agriculture, thereby putting pressure on existing cooperatives to improve production practices and returns to landowners. But market development, especially the development of land markets, has also led to worsening income distribution in some countries, a result of poor households’ having to sell land in bad years and their inability to repurchase land later. Well-developed and unbiased insurance and credit markets are needed to prevent this outcome, but these rarely develop without strict government regulation and oversight. Still, it is important to note that the absence of land markets also creates distributional problems and that land markets need not automatically result in land concentration when properly supported and regulated (FAO 1995; Vogelgesang 1996). Ongoing research will be needed to monitor the development of markets and the necessary regulations. Increased pressure from private producers appears to improve agricultural performance under current conditions, but this should not imply that agriculture will inevitably come to be dominated by this form of organization. This research suggests that, over time, we can expect a diverse mix of private and cooperative types of agricultural organization to persist across East Central Europe. As markets develop and competition for land increases, cooperatives are likely to develop new institutional structures. Some may transform into capitalist shareholding enterprises, as is currently happening in Hungary, but others may evolve into new forms of cooperative enterprises. These cooperatives may continue to draw on forms of social capital held over from the previous period, to develop new forms of economically advantageous networks, and to provide external benefits that increase returns over those available to certain classes of private farmers—at least in some regions and crops. The landscape of the post-socialist East Central European countryside is still in the making.

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TABLE A.1. Regression Analysis Results, Dependent Variable: Percentage of Agricultural Land in Cooperatives by Okrug in Bulgaria, 1992, 1994 (nm = 24)

1992 1994

Mean Beta Mean Beta COOPS39 55.42 0.37* 55.42 0.31*

Variable (stand. dev.) (t-statistic) (stand. dev.) (t-statistic)

(22.88) (2.57) (22.88) (2.01) INTERMG91/94 0.26(3.26) 0.60* (1.6)

VOTE46 69.13 ~0.36" 69.13 -0.05

(10.06) (-0.29) VOTE91/94(10.06) 45.58 (—2.5) 0.23 57.63 —0.27

(1.46) (14.90) (-1.67) Adjusted(25.00) R? 0.55 0.49

Source: Author’s calculations * = significant at p < 0.05.

Since a low level of market development should affect cooperativization levels most where economies of scale are important, the use of an interactive variable MRKTIND*GRAIN would appear to be the more appropriate test of the impact of market-related transaction costs on household decisions. This variable was not included in the analysis in the main text because the extremely low level of market development in Bulgaria in 1992 made the variable unworkable. In the regression in table A.1, such an interactive variable was in-

cluded (INTERMG91/94). In each year, the market index (MRKT91 and MRKT94) interacted with the GRAIN variable. As can be seen, the variable is not significant in 1992, probably due to the very low and even level of market development across Bulgaria in that year. But in 1994, the impact of the variable is positive, large, and highly significant, suggesting that market development has a significant impact on the persistence of cooperative farming when weighted by the importance of grain farming and scale economies.

117

TABLE B.1. Regression Analysis Results, Dependent Variable: Percentage of Agricultural Land in Cooperatives by Megye in Hungary, 1992, 1994 (n= 19)

1992 1994

Mean Beta Mean Beta COOP34 31.11 -0.15 31.11 ~0.08 (32.09) (—0.83) (32.09) (—0.30)

Variable (stand. dev.) (t-statistic) (stand. dev.) (t-statistic)

INTERMG92/94 0.70** 0.42 (3.17) (0.20)

VOTE37 0.08 —0.53* 0.08 —0.40

(0.09) (—2.36) (0.09) (—1.32) VOTE91/94 10.32 —0.66** 36.95 —0.17 (2.62) (—3.55) (4.97) (—0.55) Adjusted R? 0.45 —0.07

Source: Author's calculations * = significant at p < .05. ** = significant at p < .01.

Since a low level of market development should affect cooperativization levels most where economies of scale are important, the use of an interactive variable MRKTIND*GRAIN would appear to be the more appropriate test of the impact of market-related transaction costs on household decisions. This variable was not included in the analysis in the main text because the extremely low level of market development in Bulgaria in 1992 made the variable unworkable. In the regression in table B.1, such an interactive variable was in-

cluded (INTERMG92/94). In each year, the market index (MRKT92 and MRKT94) interacted with the GRAIN variable. As can be seen, the variable is strongly significant in 1992, when a comparatively high level of market development had already occurred. By 1994, the variable was no longer significant, perhaps because only a basic level of market development was necessary to reduce transaction costs for farmers, and this level had been achieved in most megyes. Alternatively, the level of competition in markets may have become

the most salient aspect of market development for private farmers, and our Hungarian market development variable does not capture differences in the degree of competitiveness across megyes.

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Notes Chapter 2 1. This framework does not incorporate recent work in feminist economics, which highlights the degree to which household members maximize not one, but multiple, conflicting objective functions. The feminist critique is an important one, and in a separate part of this research project I am examining the ways in which economic restructuring may be affecting the interests of various members of rural households differently. The project here, however, is limited to examining how households might be expected to respond to different contexts of restructuring if a single decision maker was maximizing returns on agricultural assets.

2. Others have noted that, in choosing new practices, actors may pursue goals slightly differently than when maximizing their own return. They may choose practices that maximize their own gains over others (Knight 1992) or may maximize returns to a group through collective action (Ostrom 1990). While these two frameworks offer important insights into the behavior of economic agents under certain conditions, I believe that the dynamics of East Central European agriculture in the 1990s are best captured by an assumption of individual maximizing by households. 3. Of course, the problem of obtaining optimal work effort is not limited to socialist farms. The problem also exists in any organization that hires labor (see Meurs 1993a and Eswaran and Kotwal 1989). 4. Overall, however, the socialist farms in Yugoslavia were more efficient than the private farms, due to differences in the capital and technology available to the two sectors. No efficiency ranking was possible in Poland. 5. Private production remained strictly limited in most places, however. In Bulgaria, households farmed an average to 0.3 ha, and most households continued to sell

any small surplus exclusively to the state. Few households (6 percent of surveyed households in 1986) admitted selling on free cooperative markets (Institute of Sociology 1986). In Hungary, only 21 percent of plots in 1989 exceeded 2 ha (Harcsa 1992, 13).

6. Output in the cooperative sector grew even faster, dwarfing the production of private households, and the private sector’s share of agricultural output fell from 40 percent in 1970 to 34 percent in 1981 (Szelenyi 1988, 36). 7. Others have argued that the reorganization was not the main driving force behind the productivity growth. See, for example, Putterman 1993. 8. For an interesting model of these dynamics, see Mathijs and Swinnen 1997. 9. The impact of differential pricing was reduced in Hungary in the 1980s, when 85 percent of all agricultural producer prices were freed, but even then private producers tended to benefit from the relative scarcity of their products. 10. The Hungarian figure does not include the new corporate forms of farming, which controlled 20 percent of arable land in 1994 (HNIS 1994a, 176). 11. The issue of scale economies in agriculture is highly debated. Binswanger and Deininger, for example, argue that the high costs of labor supervision on large farms that hire labor outweigh other productivity advantages that scale might offer (1997). But

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120 Notes to Pages 14-38 significant increases in scale are possible in East Central Europe under the given technology without requiring the hiring of labor. Marty Strange (1988, 81-99), for example, found that in the United States scale economies are exhausted at a farm size of 120-200 ha, a mechanized farm that can be run by one or two people. 12. An obvious question emerges: If cooperatives have these incentive advantages, why are more of them not found in modern economies? A number of explanations have been offered to explain their absence, all based on characteristics of developed capitalist economies. Given the dominance of capitalist work organization and individualist social norms, collective management of production may require significant learning, which would constitute a short-term transaction cost disadvantage for cooperatives. The economic inequality and economic instability of modern capitalist economies may also undermine and disadvantage the solidaristic behavior upon which cooperative organization depends. Finally, cooperatives may suffer disadvantages when obtaining credit in developed market economies in which credit depends heavily on the availability of collateral, which workers are unlikely to have in adequate amounts (Bowles and Gintis 1993).

13. While the costs involved in motivating labor in cooperatives and private farms discussed earlier also represent a kind of transaction cost, the transaction costs to which |

refer are distinct and result from the degree of development of input and output markets external to an enterprise rather than the specific institutions of organizing labor within a given enterprise. 14. David Stark (1992) has discussed similar distributions of capital on the basis of “positional assets” in other East Central European cases. 15. However, cooperatives are an important form of organization for agricultural services and credit in many countries. 16. Alternatively, Daniel Bromley argues that efficiency cannot be evaluated independently of concrete institutional structures (1989, 32). In that case, cooperatives might provide the best solution in the current East Central European context, although private farming might provide the best solution if markets functioned perfectly. 17. This example captures the specifics of the Bulgarian case. A similar dynamic may emerge where cooperative members participate with shares instead of land, but no competitive market exists for shares, as is the case in Hungary.

Chapter 3 1. The research team was composed of a group of scholars from the Institute of Sociology of the Bulgarian Academy of Sciences, led by Veska Kouzhouharova and Stanka Dobreva. 2. These plots were issued by collective farms to members and other villagers for household use during the socialist period. They were usually limited to 0.5 ha. 3. After the victory of the Socialist Party in national elections in December 1994, amendments to the land law were passed that slightly limited the rights of owners as outlined previously. The amendments were then overturned by the Constitutional Court, and as of late 1995 the legal battle continued. Since these changes took place after our 1994 survey, they do not affect the analysis in this book. 4. By 1994, some of the households in the original sample no longer existed. Of the original 600 households, 445 were surveyed in both 1992 and 1994. The total sample of

Notes to Pages 38-72 121 569 households surveyed in 1994 is thus composed of 445 original and 124 replacement households. These replacement households most often occupied the same address as the previously interviewed households. 5. The okrug ceased to be a legal and administrative unit after 1987. We use the unit here because it conforms to the unit of analysis in the 1986 data. 6. Important exceptions were specialization in the tobacco-growing region of Kurdjali and in the semimountainous northwestern vegetable-growing okrug of Vratsa. 7. Studies carried out by the OECD (1997) and the World Bank/EC-PHARE program (1993) note low levels of market development similar to those found in our survey. 8. Since a prevalence of grain production should affect cooperativization levels only where markets are weakly developed, and vice versa, the use of an interactive variable MRKTIND*GRAIN would appear more appropriate. The variables are included separately because of the extremely low level of market development, which effectively eliminates an interactive variable in the 1992 equation. In a separate estimation, using the interactive variable, the variable is thus not significant for 1992, but it is positive, large, and highly significant for 1994 (see appendix A.1).

9. This model extends earlier work done in collaboration with Darren Spreeuw (Meurs and Spreeuw 1997). 10. We used data from 1987 because this was the last year that data were published on the basis of okrugs, the administrative unit on which our lists are based. Data are not published for smaller administrative units in which the households are located, for example, the obshtina, or village. 11. An average household is defined as having the mean value for each significant variable.

Chapter 4 1. See Hughes 1998 for a study of relative productivity of private and cooperative farms in the Czech Republic. Hughes finds that the Czech cooperatives continue to outperform private farms (in terms of total factor productivity) for plant crops, although private farms have higher total factor productivity in livestock. 2. We will follow the OECD in using the term collective farm to refer to the farms that resulted from the joining of previously privately run farms into a unit closely guided by socialist state policy (OECD 1994, 39). This terms seems more appropriate than the term cooperative farm, which implies a level of voluntariness of membership and independence of management which did not exist in Hungary, at least over most of the socialist period. Still, the Hungarian farms were, as will be seen, significantly more independently run and subject to member influence than were most of the Soviet-inspired collective farms, and so the term collective farm is also used with some hesitation. 3. Output in the cooperative sector grew even faster, however, dwarfing the production of private households, and the private sector’s share of agricultural output fell from AO percent in 1970 to 34 percent in 1981 (Szelenyi 1988, 36). 4. Law LIT] of 1992 specifies the treatment of the 139 Hungarian state farms that existed in 1989. The government will maintain a majority stake in those state farms specializing in the genetic improvement of plant and animal species, under the management of the state asset holding company (OECD 1994, 60). State farms not specializing in genetic improvements will be privatized.

122 Notes to Pages 74-97 5. I was not permitted direct access to either the census or the survey data. The data presented here are drawn from work by Istvan Harcsa, a collaborator at the HNIS, or were prepared by him at my request. 6. Note that specialization does not always imply commercialization. For example, only 21 percent of households specializing in garden vegetables actually marketed any. For households specializing in greenhouse crops, however, the share of marketing households was 88 percent (Harcsa 1992, 31). 7. This is a 6 percent sample of the 35,000 top farmers, minus unusable cases.

8. p>.10,p.10,p