Policy Papers

  • 14.06.2012

    The Draft Law On Agriculture: Questionable Objectives and Inappropriate Instruments


    On January 27th 2012, the Ministry of Agricultural Policy and Food of Ukraine made public its Draft Law ‘On Agriculture’. So after more than 20 years of transition Ukrainian agriculture is near to have its own  framework law. In its current form, however, the Draft of the Law contains quite questionable objectives of the State agricultural policy (SAP) and the measures to reach them.

    The objectives of the SAP in the Draft Law mainly remind modern agricultural policy objectives. Further detailed analysis of the Draft Law, however, reveals that food security is meant in a sense of food self-sufficiency. The widely accepted definition of food security, however, emphasizes physical availability of food, as well as its economic availability, i.e. at reasonable prices. Ensuring food self-sufficiency will exclude Ukraine from international trade and specialization benefits, thus making the country overall poorer.  

    Another deficiency is that achieving productivity increase is completely missing from the set of SAP’s objectives. And this is despite the fact that productivity in Ukrainian agriculture has been below the corresponding worldwide averages over the last decade, although growing conditions in Ukraine are certainly above average. Economic research suggests that the only sustainable way to increase the competitiveness of agriculture is to ensure its productivity growth. Given the current productivity gap in Ukraine, this should be the key issue for the government; focusing on fostering technical and efficiency progress will ensure food security in the country and increase the contribution of agriculture to national economic growth and welfare. So with regard to the objectives of the State Agricultural Policy, we suggest the following:

    1. streamline the objectives of the State Agricultural Policy according to the modern agricultural policy principles, i.e. to the EU principles, 

    2. ensure that food security is appropriately defined in the Draft Law,

    3. ensure that increasing productivity to be the key objective of the State Agricultural Policy.    

    The key element of the Draft Law is the system of so-called agricultural passports. Individual agricultural passports are developed for five years and contain agricultural production standards as well as the five-year planned production and other targets. The system is structured in the following way: agricultural passports are developed for each agricultural enterprise and afterwards they are aggregated to administrative unit (rayon) level and further up to regional (oblast) and to the national level, i.e. to ‘Agricultural Passport’ of Ukraine. Local, regional and national agricultural development programs should be based on the agricultural passports and achieve the targets specified in these agricultural passports. 

    Agricultural production standards, among other things, set up the norms for crop structures and rotations, for densities of keeping animals, preserving specialization of the farm, as well as preserving soil fertility etc. Moreover, the Draft Law foresees administrative and even criminal responsibility for breaching of the agricultural production standards. The ultimate result of these will be the failure of ‘invisible hand’ of the market to restructure Ukrainian agriculture into a more competitive and productive sector. Freezing crop and animal structures for five years destroys one of the fundamental market mechanisms of adjusting production plans according to the international markets price signals; it will ‘freeze’ non-competitive farms in the sector. Essentially the system of agricultural passports is a return to the principles of central planning of the Soviet era.  A further key instrument of the SAP is price regulation. The Draft suggests allowing price fluctuations within the price bands, i.e. within minimum and maximum prices, and apply market interventions, pledge purchases, export and import quotas and other trade barriers to keep the prices in the band. In case the difference between the market price and corresponding min-max limits exceeds 20%, administrative measures may be imposed. The economic literature is quite unanimous about the negative consequences of this instrument. Moreover, it is incompatible with WTO standards and it inflicts huge budget expenditures and huge social losses to the economy. With regards to the instruments of the State Agricultural Policy we suggest the following: 

    4. drop the concepts of agricultural passports and agricultural production standards; if the government wants to keep it, they should not be binding for producers and should not foresee any kind of responsibility for breaching of the agricultural production standards; the government should use them exclusively for purposes of monitoring, reporting and adjusting policy measures; 

    5. if the main purpose of agricultural production standards is preserving soil fertility, the government should tackle the problem directly, via enforcing the Law of Ukraine ‘On Land Protection’, but not intervening directly into the production process;

    6. turn down the idea of price regulation; on the contrary, the government should declare its adherence to free market pricing by a binding commitment that it will not interfere on agricultural markets.  

    Overall, the Draft Law has a strong ‘non-market’ or central planning flavor with potentially significant negative economic consequences as well as it does not take into account the lessons that the EU learnt with its heavily regulated CAP. In its current form, the Draft Law should be heavily reconsidered.

    Authors:  Nivievskyi Oleg
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