Agricultural Distortions In Ukraine

Political Economy of Public Policy

Distortions to Agricultural Incentives in the Ukraine

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Ag. Support Distortions in Ukraine

Ukraine: outline 

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Strong potential for agricultural (especially grain) production Until 1991 was part of the Soviet Union Before independence: central planed economy; high reliance on state subsidies; production increments of production “by decree” After independence: lack of management skills; old and inadequate infrastructures/technology; undeveloped marketing systems

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Ag. Support Distortions in Ukraine

Overall Rates of Assistance 

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From 1992 to 2005, only in two years were the Aggregate NRAs positive… … And in only 3 of those years have the RRA been positive for agriculture

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Import substitutes receive high levels of assistance

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Export products (grain, oilseed) are taxed

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Pro-urban, anti-agricultural bias

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In 2000 and 2003 the Ukraine turned from exporter to importer of wheat

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Ag. Support Distortions in Ukraine

Individual Rates of Assistance (2005) 

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Negative

- Beef

- Barley (#5)

- Egg (#12)

- Maize (#14)

- Oat (#10)

- Milk (#10)

- Pigmeat

- Rye (#5)

- Poultry

- Wheat (#11)

- Sugar Beets (#5) Sources: World Bank; FAO 16/11/08

Ag. Support Distortions in Ukraine

Types of Market Distortion in Ag Policy 

Export taxes/bans

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Import substitute tariffs

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Frequent policy over-reaction to market fluctuations

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Overvaluation of currency

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State controlled marketing of products and distribution of agricultural inputs

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Regional confiscation of produce and bans on exports

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Low but heterogeneous tariff protection

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Heterogeneous fiscal support

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Ag. Support Distortions in Ukraine

Sources of Market Distortion in Ag Policy 

Dispersed decision-making

- Ministry of Agriculture - Other Ministries - President's Special Powers 

Parastatal/monopolist marketing systems

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Large, influent bureaucracy (at national, regional and local level)

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Rent Seeking

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Corruption (local authorities/marketing companies/food processors/farm managers)

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Interest Groups/Oligarchs turned MPs

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Lack of expertise in economics/management

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Little development of Land Markets

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Ag. Support Distortions in Ukraine

The Iron Triangle: Interest Groups 

Information/Agenda Control

- Focus on the relationship of Ukraine with the EU and Russia  

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Large minority of ethnic Russians Inefficient and state-dependent farmer groups and food processor groups Most of the influence is through direct corruption and bribing of bureaucrats

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Ag. Support Distortions in Ukraine

The Iron Triangle: Bureaucrats 

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Bureaucrats are reminiscent of the Soviet-era Nomenklatura Regional and local bureaucrats have disproportionate autonomy and power Frequent bribing and corruption to favour local food processors Marketing systems are still under bureaucratic control Little or no management and economics knowledge in present bureaucrats

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Ag. Support Distortions in Ukraine

The Iron Triangle: Politicians 

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Many oligarchs became MPs after the Independence Frequent toppling of Governments; two blocs formed, one “ProWestern”, another “Pro-Russia” These blocs use ideology to justify many political measures and economic instruments Socialist and Communist ideologies used to justify lack on reform in land markets Frequent overrides in agriculture policies, because of conflicting decision-making Ideology and caving in to (few) interest groups are the way Ukrainian politicians decide on measures This results in instability and frequent changes in policies as result of small market fluctuations

16/11/08

Ag. Support Distortions in Ukraine