You're reading: Business Sense: Lifting ban on farmland sales will bring economic benefits

Marcin Swiecicki, director of the Blue Ribbon Analytical and Advisory Centre informs readers.

President Viktor Yanukovych’s economic program for 2010-2014 names the absence of a market for buying and selling agricultural land as one reason why the nation is unattractive for investment.

Many agriculture and investment experts agree.

The prospect of giving more rights to 6.9 million owners of land plots spurred defenders of the status quo, such as Michael Lee in his column “Nation should not be in rush to lift moratorium on sale of farmland” (Kyiv Post, Nov. 12, 2010).

In this article I will try to address the arguments Lee gave in defending the existing moratorium on agricultural land sale.

He argues that “in many cases” landlords will not spend lump-sum cash payments wisely; therefore it is better for them to receive “a regular annual payment made every year.”

A further argument presents foreign companies renting land like charitable organizations spending their dividends “on tractors and fertilizers,” whereas companies that would own the land would apparently behave as greedy capitalists transferring profits abroad.

He argues also that landowners can “kick out” a foreign investor who uses fertilizers and chemicals in inappropriate way. If the land is sold, “who can predict what farming practices will take place in the future?”

Lee frightens landlords. According to him, the current system increases “the total amount of investment coming to the country” since small investors do not need to buy land. He ends by providing the example of the United Kingdom having harvest yields several times higher than in Ukraine, despite the fact that in U.K. most “farm businesses … do not own the land.”

I disagree with the analysis and believe that the termination of the moratorium, together with the adoption of proper regulatory laws, will produce many positive results for owners as well as for the national economy.

The moratorium infringes on the ownership rights of some 7 million small landowners. Let them decide what option is better: to sell the land or to continue the renting it out to somebody else. Otherwise, Ukrainians will remain in communist reality, where they possess but do not dispose of the property.

There are a lot of old people who would prefer to sell their land and move closer to their children living in cities or buy medicines or to do other things with their proceeds. The state should provide a legal framework and help the citizens by assisting auctions for land, providing public information about all land transactions and ensuring an efficient land register so that the new owner will feel secure and will be willing to pay more.

Keeping the ban under the pretext that this is in the best interest of the owner is morally dubious. It harms millions of rural inhabitants, since most of them do not have the professional knowledge and physical means to farm.

A number of the land plots either remain idle or are rented by big companies almost free of charge. Unable to sell their land, millions of citizens feel abused.
Lifting the moratorium will provide owners with an additional option to renting their property. Lifting the moratorium will boost rents. Present rents are low, estimated at 260 hryvnias ($33) per year per hectare, which is very beneficial for large companies.

Furthermore, ownership of a land plot is usually the only valuable asset that landowners could use as collateral to get loans from banks. But the moratorium prevents this as banks cannot accept non-tradable assets as security for loans. Therefore, millions of landowners cannot get loans to launch their agricultural business or obtain start-up capital for other non-agricultural ventures.

The Ukrainian Institute of Agrarian Economics estimates the total value of Ukraine’s agricultural land at $59.2 billion.

The absence of an agricultural land market makes it impossible to verify this amount, but it is many times more than all the investments into primary farming in the last decade.

From 2001 to 2006, this figure was estimated at only $3 billion. Agriculture is therefore heavily underinvested. In addition, the introduction of agricultural land mortgages will work to reduce interest rates and make lending more accessible for small- and medium-sized farms.

The lack of a land market makes Ukrainian agriculture even less attractive for investors. If the moratorium had played a favorable role in attracting investors, why are other countries not introducing it? I do not think that Lee believes that United Kingdom agriculture would become more prosperous by introducing a moratorium on trade in land. It is prosperous due to many reasons including, first of all, the honoring of ownership rights.

Keeping land in good condition requires long-term interest and engagement through investments such as in irrigation, storage and machinery. When owned, the soil is treated much better than when rented. The state and quality of agricultural soils in Ukraine have dramatically deteriorated in recent years. Lifting the moratorium and hence owning the agricultural land should increase the interest of the owner in keeping the soil fertile and environmentally sound.

The orchestrated delay in launching the agricultural land market precludes the optimal re-allocation to more efficient users. Only a viable market mechanism can ensure the best results for the national economy in terms of productivity. In the meantime, restrictions are provoking the development of a shadow land market, to the detriment of general welfare.

Marcin Swiecicki is a former minister for foreign economic relations of Poland and co-author of the Polish stabilization plan and sweeping economic reforms from 1989 to 1991. Since 2007, he has been director of the Blue Ribbon Analytical and Advisory Centre (BRAAC), a project funded by the European Union as well as co-funded and implemented by United Nations Development Program. The opinion presented in this article is that of the author and does not necessarily reflect the views of the EU, UNDP or any other UN agency.