potential implications for productivity of land reform in bulgaria

This paper analyses the possible outcome for productivity of the post-1991 land reform in Bulgaria. Critical deter- minants are the proportion of landowners who attempt to create family farms, the pace of creation of new private producer cooperatives or farming companies, the relationship between farm size and productivity and the variables which strengthen or weaken this relationship. The discussion suggests that even after land reform the major share of land and output will remain on a relatively small number of larger farms, and, provided appropriate market incentives exist, the expected gains in technical efficiency from a less polar- ized farm structure will be reinforced by other factors Including labour market, credit and technical change. Productiv- ity in Bulgarian agriculture has the capacity to increase as a result of the land reform. Thus with the same resources there could be an increase in output, relieving worries about security of food supplies.

Allan Buckwell is Professor of Agricultural Economics, Wye College, University of London, Wye, Ashford, Kent, TN25 5AH, UK (Tel: 0233 812401; fax: 0233 813006). Sofia Davidova was CEAS Research Fel- low at Wye College in 1991. She is now with the Institute for Agricultural Econo- mics, Sofia, Bulgaria.

Potential implications for productivity of land reform in Bulgaria

Allan Buckwell and Sofia Davidova

The objective of this paper is to identify some of the potential implications for productivity of the post-1991 land reform in Bulgaria. This land reform is defined in the Law for Agricultural Land Ownership and Land Use (henceforth abbreviated to LALOLU) of February 1991 which was amended in March 1992. Analysis is limited to two questions. First, what is the likely outcome for farm structures arising from land reform? Second, what will be the effects of land reform on productivity? In drawing conclusions from the analysis some policy implications are briefly discussed.

The structure of the paper is as follows. The first section describes LALOLU and pre-reform land ownership and farm structures. There follows a list of the necessary assumptions to predict possible outcomes of the land reform, and results are deduced from these assumptions. The final section discusses consequential impacts on productivity.

Law for agricultural land ownership and pre-reform farm structure

In February 1991 a Law for Agricultural Land Ownership and Land Use was passed by the Great National Assembly in Bulgaria. It has since been amended several times, principally in March 1992 (Ownership and Use of Farm Land Act, April 1992). As amended it deals with five main issues: agricultural land privatization; land settlement; transferability of property rights; liquidation of collective farms and distribution of their non-land assets; and institutions dealing with land ownership. The LALOLU has been translated into rules and procedures (Rules for the Application of the Ownership and Use of Farm Land Act, April 1992). The following discussion on land reform is confined to those legal provisions and rules that are of direct importance in analysing its likely

effects. Farm land may be individual citizens’, state, municipal or legal

entities’ property. Foreigners are only allowed to own land on the basis of inheritance, and they must transfer the property rights to the state, municipalities, individuals or legal entities within a three-year period.

The main provision of the LALOLU is to give the land back to the owners before the collectivization in the late 1940s and 195Os, or their

0306-9192/93/060493-l 4 0 1993 Butterworth-Heinemann Ltd 493

Productivity and land reform in Bulgaria

heirs. Thus the LALOLU implies a particular redistribution of property rights. Technically, agricultural land in Bulgaria remained private property throughout the Communist period. The main exception was the state-owned land, estimated to be some 800 000 ha, about 17% of cultivated area.’ However, private owners have been deprived of enjoying possession, use and rights to the fruits of ownership. Effective- ly, agricultural land has not actually been in private ownership. The most suitable term to describe the core of the land reform is therefore ‘land privatization’. Alternatively, it is a post-Communist de- collectivization.

According to the LALOLU, proprietors shall be reinstated in farm land up to limits set by the Labour Land Ownership Law, passed in 1946 (Durjaven Vestnick). According to the 1946 law, depending on the region, farms with more than the limits of 20 and 30 ha had some of their land removed to bring them to the maximum size. The land thus nationalized involved some 300 000 ha, of which about 120 000 ha were distributed to a similar number of landless peasants. State farms were set up on part of the remaining land, and the residual was given to cooperatives.’

Private land on which there are no claims due to the lack of heirs or title documents will be pooled into municipal land reserves. Where the area of farm land within the territory of any settlement has been reduced due to the fact that it is no longer in agricultural use, or that it was used as a government debt redemption, the area of land subject to restitution shall be reduced accordingly. Owners at their request will be compensated for the difference between the area under rightful claim and the area restituted, either with land from state or municipal land reserves or with money.

Reinstatement in property shall be done within the real boundaries of land owned where these still exist or where they are easily re- established. Where boundaries of land no longer exist, reinstatement in ownership shall be done within real boundaries of farm land of equivalent area and quality in compliance with a plan of farm land division. For a two-year period from the date of reinstatement of ownership the area of land owned and purchased through legal deals is limited to 30 ha per family. This limit is similar to those provided by the Labour Land Ownership Law of 1946. Households and individuals are allowed to lease or rent land without limit. Owners are allowed to rent out and lease out land immediately after the recognition of property rights.

LALOLU provides for the forced liquidation of all state cooperatives and distribution of their non-land assets amongst eligible owners. Existing or former members of state cooperatives or their heirs have rights to shares in the farms’ capital stock. The size of each individual share will be determined in accordance with the land and other physical or financial assets which the owner had pooled in the cooperative, and his or her labour contribution.

Consequently, if implemented fully and literally, LALOLU may bring about a reversal in farm structure from the highly concentrated existing structure to that prevailing in the period before the second world war.

‘P. Konishev, ‘Mai shte grabnat Chetirilist- nata Detelina’, Zemia, 29 October 1991. ‘S. Syulemezov, The Co-operative Move-

Pre-reform farm structure

ment in Bulgaria, Sofia Press, Sofia, 1976. In order to describe possible post-reform farm structures two reference

FOOD POLICY December 1993


Table 1. Farm structure in Bulgaria, 1934 and 1989.

Farm size range (ha)

f No of farms

% of total

1934

Area (ha)

\ % of total

19898 r \

No of % Of Area % of farms total (ha) total

up to 1 1-2 2-3

119627 13.52 58 409 1.34 1 600 000 99.98 635 000 14.00 119790 13.54 174 738 4.00 _ - 116967 13.22 287 492 6.58 _

3-4 107 817 12.18 371 714 8.51 _

4-5 94 904 10.73 420 492 9.63 - 5-6 72 894 8.24 396 222 9.07 - _ 6-7 56 732 6.41 365 355 8.36 - _ 7-8 43 288 4.89 322 206 7.38 - _ 8-9 33 621 3.80 283 842 6.50 - - _ 9-10 25 346 2.86 239 648 5.49 - _ IO-15 62 488 7.06 745 789 17.07 - _ _ E-20 18 745 2.12 318 701 7.30 - - 20-30 9 623 1.09 226 166 5.18 - -

3c-40 1 927 0.22 64 955 1.49 - 40-50 539 0.06 23 666 0.54 - 5&i 00 561 0.06 69 136 1.58 - 100-500 _ _ _ 500-l 000 - - - _ - 10olt10 000 - - -

10 ooc-15 000 - 269 0.02 3 940 900 86.00

Total 884 869 100 4 368 42@ 100 1 600 269 100 4 575 900 100

?Size of farms in 1989 is the average of agro-industrial complexes on the one hand and of private plots on the other. bThis is the area under private farms excluding land owned by the Church, schools and common land.

Sources: Recensement des Exploitations Agricoies, Statisticheski G~is~~i~ na Tzarsfwo Bulgaria, 1934; Ministry of Food and Agriculture database, 1990.

points are important: one pre-Communist year and a recent pre-reform year. The last detailed pre-war farm survey was carried out in 1934. General data available for the first post-war year show a few insignificant changes in farm structure compared to 1934. For this reason 1934 is chosen as a pre-collectivization reference year. The year 1989 is chosen as the latest pre-reform year in Bulgaria before the beginning of political and economic transformation.

Table 1 provides data on these years. In 1934 there were about 885 000 private farms with an average size of 4.9 ha of utilized agricultural area (UAA). Of the total, 69% were operating on owned land only, and 99.4% were one-man farms. Farm structure in 1989 was bipolar, with 1.6 million private plots averaging 0.4 ha and 269 agro-industrial complexes averaging 14 650 ha.

The third useful point of reference is the progress in land reform and changes in farm structure since the beginning of the economic reforms in Bulgaria. Towards the end of 1989 agro-industrial complexes were removed and broken up into smaller state cooperatives with an average size about 2 000 ha. These cooperatives are now to be liquidated by virtue of the LALOLU.

By 4 August 1992, the deadline for submitting claims, 1.7 million claims had been received by Municipal Land Commissions. Several studies of the intentions of owners showed that less than 10% intended to take their land back in order to organize an individual private farm. Most of the replies showed explicit preference towards leaving the land in some kind of new private producer cooperatives.

The extent to which progress in land reform has created a redistribution of land can be seen by the results of a census carried out by the National Statistical Institute in July 1992. The area in the private sector in mid-1992 was 1.25 million ha. Compared to 1989, the land area in the private sector had increased by 515 000 ha. The largest part of the land

FOOD POLICY December 1993 495


Table 2. Groups of private farms according to area cultivated, July 1992.

Total 0.1-I ha 1.1-5 ha 5.1-10 ha >lO ha

Number

1 964 390 1 783 608

171 394 8 608

580

Share in total area (%)

100.00 90.60

0.72 0.44 0.03

Source: National Statistical Institute, Sofia, 1992.

area outside state cooperatives was allocated to individuals for temporary use on the basis of their claims. As more than 95% of privately farmed area is on holdings up to 1 ha, the farm structure outside the collectivized sector does not differ significantly from the structure of the pre-reform private plots (see Table 2).

By the end of November 1992,289 new private producer cooperatives had been set up, with a land area accounting for 75 000 ha (260 ha each on average). These newly registered cooperatives have been set up on land for which private owners have temporary certificates. By the same time only four state cooperatives of about 2100 ha had completed the liquidation process.

In summary, the land reform process has not progressed sufficiently to give clear indications of the post-reform farm structure. To make projections of the possible outcomes of land reform it is necessary to identify the main relevant factors and to make assumptions about the nature of relationships and parameters, and then deduce their consequences and implications. In general the following assumptions are based on the pre-war and pre-reform farm structures, legal provisions, the outcomes to date in the land reform, and results from public opinion surveys. However, the empirical basis for some of the assumptions is slender, so little emphasis should be placed on the precise numerical results. If the analysis has value it is in the identification of the relevant variables and as an illustration of the way these might interact.

Post-reform farm structures

The analysis is concerned with the medium-run impact of land reform after it has been fully executed. In reality not only will the land reform process span several years but its effects will be modified by further structural adjustments brought about by market forces and the price policies pursued by the government.

Our assumptions are classified into four groups.

Sources of land and quantity of land notionally available for distribution

The main source of land for redistribution is the collectivized sector because the majority of the land of former owners was compulsorily collectivized. That is why movements of land from the national and municipal land reserves are expected to be insignificant, and they are ignored. It is assumed that all owners or their heirs have private plots because, in principle, members of cooperatives have had rights to private plots created after the collectivization of agriculture. The members of cooperatives were the landowners forced to pool their land into collective structures. It is assumed further that land under private plots will not change ownership. However, it is possible for plot owners to create individual family farms by merging the land in their plots with land reclaimed under the reform.

Based on these assumptions the area of land notionally available can be determined. For this purpose the land distribution in 1989 is used.3 The total amount of cultivated agricultural land available was 4.576 million ha, of which 3.941 million ha were in the collectivized sector and 0.635 million ha were on plots.

3Statisticheski Godishnik na Bulgaria, Post-reform farm structures and average sizes

1990. It is assumed that four main types of post-reform farm structures will

496 FOOD POLICY December 1993


emerge, namely private plots, family farms, farming companies and private producer cooperatives. Of these, only private plots existed in the pre-reform period. The land reform will bring the bipolar structure to an

end, creating opportunities for new structures to emerge. However, the pre-reform structure cannot be ignored; private plots and producer cooperatives will continue to play a part in Bulgaria’s farm structure. It is likely that people will wish to preserve their private plots in order to ensure household food supplies and derive some additional income. Based on survey evidence of land claimants there is a preference for continuing the tradition of producer cooperatives that started before the second world war. Producer cooperatives are likely to be one of the favoured management forms. These cooperatives will be private and operate in a quite different way from the present state cooperatives. Farming companies and private cooperatives are expected to emerge from farm units in the collectivized sector after their liquidation. However, another of the outcomes of de-collectivization is expected to be family farms which may be created around the nucleus of existing private plots using land withdrawn from the collectivized sector by some individual owners.

In this analysis the average sizes of the different farm structures are estimated. The average size of plots is assumed to remain the same (0.4 ha) as in the pre-reform period. Small family farms are assumed to emerge (5 ha in size, on average, which was the average pre-war size of private farms as shown in Table 1). The assumed average size of private farming companies and cooperatives is 2.50 ha, based on experience of the new private producer cooperatives documented above.

Number of owners, farms and distribution of land

The number of owners is equal to the number of farms. Thus there are no cases of multiple ownership of the same farm nor of individual owners having several farms. This assumption is a reasonable approx- imation of the pre-Communist reality in Bulgaria. It implies that the number of private farms pre-collectivization (885 000) indicates the maximum potential number of landowners or family farms after the reform. This appears to conflict with the 1.7 million claimants of land registered in 1992. The reason for this is not clear, but may result from the distribution of the original titles amongst heirs or because there may be more than one claimant per original ownership despite the regula- tions which were meant to avoid such a situation.

The existence of more than one heir of the former owners does not influence the maximum potential number of owners or farms. This is due to the fact that the LALOLU puts restraints on the area owned within a family. As a result a family is the basic unit for land redistribution, and usually it includes more than one owner or heir.

The number of owners who will take their land back as a proportion of the total number of claimants is the same as the area of land withdrawn for individual farming expressed as a proportion of the total quantity of land available for distribution. This assumption is based on the fact that before collectivization there was a relatively small range of farm sizes (Table 1).

Not all former owners are assumed to be able to create a family farm in the post-reform period. It is estimated that 25% may have difficulties. Of these, about 10% result from land having been used as Bulgarian government debt redemption and transferred to neighbouring coun-



‘Authors’ estimates

Table 3. Practically possible number of claimants who can create family farms, and land area available.

Theoretical Less 10% lost landa

Possible Less 10% without heirs or documents Less 5% foreign nationalsa

Maximum expected

No of claimants (‘000)

085 89

796 80

40

676

Land from state co-ops (‘000 ha)

3 941

394

3 547

Land from plots

635

635

Total land

4 576

4 182

tries, transferred to non-agricultural uses or contaminated by industrial pollution. This loss is already reflected in the measured land available in 1989. Thus, of the eligible 885 000 owners, 90% (796 500) will actually be able to receive land on the basis of availability in 1989. Of these, a further 10% will not be able to claim their land because they died without heirs or their title documents never existed. Their land will be pooled into the municipal land reserve. Another 5% unable to create a family farm on their land are foreigners. Therefore only 85% of owners who can claim their land on the basis of land availability in 1989 will be able to create a family farm.

These assumptions refer to the land currently occupied by collectives that is subject to privatization. They do not concern land under private plots because this land will not change ownership. Their practical effect is that the maximum possible number of owners of family farms is 75% of the theoretical maximum potential number. These assumptions also influence the available quantity of land. This is illustrated in Table 3. Of the 3.94 million ha of collectivized farm land only 90% is available for family farms or farming companies and cooperatives because it is assumed that the other 10% were not claimed and was thus transferred

to the municipal land reserve.

Behaviour of owners and their heirs

The level of enthusiasm among landowners in Bulgaria for setting up family farms is a matter of considerable speculation. The great uncer- tainties, combined with a lack of business management skill and confidence, are justifications for the fairly low propensity to take up this challenge in the near future that was found in surveys of owners’

intentions. However, it is assumed that once owners actually have their property reinstated a larger portion than the surveys so far suggest will decide to farm individually. As a result two alternatives are developed to show the impacts of a range of possible behaviour on the part of landowners and their heirs.

30% of former owners or their heirs withdraw their land from collectives after the recognition of property rights in order to create a family farm. The rest leave their land in farming companies or new private producer cooperatives. Alternatively, only 15% of former owners or heirs withdraw their land from collectives in order to create a family farm.


All owners who create a family farm merge their newly acquired land with their existing plots. Foreign nationals are assumed to prefer to transfer their property rights to individuals rather than to the state,


Table 4. Expected post-reform farm structures.

Private Family co-ops/ farms companies

If 30% of owners set up private farms 314 9

5 250 1 570 2 168

38 52

If 15% of owners set up private farms 177 11

5 250 833 2 759

21 66

Total

4B.N. Verma and D.W. Bromley, ‘The political economy of farm size in India: the elusive quest’, Economic Development and Cultural Change, Vol 35, No 4, 1987, pp 791-808. 5A. de Janvry, Farm Structure, Productiv- ity, and Pov&y, Working Paper No 432, Division of Agriculture and Natural Re- sources, Univ&sity of California, Berkeley, CA, 1987.

Number (‘000) 1111 Size (ha) 0.4 Area ijOb ha) Area (%)

445 11

Number (‘000) 1 349 Size (ha) 0.4 Area (‘000 ha) 540 Area (%) 13

1 434 2.9

4 182 100

1 537 2.7

4 182 100

municipalities or legal entities. As a result their land is available for the creation of family farms.

Using all the above assumptions and estimates it was possible to calculate the number of farms, total area and average sizes in each of the four farm size categories post-reform. The main result, shown in Table 4, is that Bulgarian agriculture will remain relatively concentrated immediately after land reform. Even if as many as 30% of landowners decide to set up their own family farms, there still remains over half of the land in the possession of farming companies or private producer cooperatives. In this case family farms account for 22% of land holdings, but almost two-fifths of the land. If only 15% of owners set up family farms, two-thirds of the land will remain on the largest 0.7% of holdings, and family farms will account for about 12% of holdings and a fifth of the land.

Consequences for productivity

Despite the obvious general interest in knowing whether big farms are more or less efficient than small ones, and the large amount of theoretical and empirical analysis addressed to this and related questions, no generalizations have emerged from either the developed or developing country literatures; controversy reigns. As observed by Verma and Bromley,4 much of this results from the diversity of conceptual frameworks deployed by analysts, and the rest results from differences in empirical technique. De Janvry does much to show how apparently contradictory results can be explained by defining a wide enough analytical framework.5 For this reason his approach will be followed here.

In the context of Central and Eastern Europe the prime question is simply stated: What will be the effects of the post-Communist land reform on agricultural productivity and on agricultural output? In posing this question, it is of course realized that the development of productivity and output does not depend only on production considerations. The structure and performance of the input supply and output processing sectors, the price and trade regime, and the macroeconomic environment will all have at least as much effect on output as farm structure and farmer behaviour. However, because land reform is a political imperative and because farm size is a (deceptively) simple concept about which farmers, their leaders, politicians and even economists seem compelled to have an opinion, it is judged that it is useful to consider the size-productivity question in isolation. Any answers can



6A. Berry and W. Cline, Agrarian Structure and Productivity in Developing Countries, Johns Hopkins University Press, Balti- more, MD, 1979. 7For example, P.J. Dawson and L.J. Hub- bard, ‘Management and size economies in the England and Wales dairy sector’, Jour- nal of Agricultural Economics, Vol 36, No 1, 1987, pp 27-37; and M.C. Murphy, Report on Farming in the Eastern Counties of England, Department of Land Economy, University of Cambridge, 1990. ‘M.L. Boyd, ‘Organizational reform and agricultural performance: the case of Bulgarian agriculture, 1960-1965’, Journal of Comparative Economics, Vol 14, 1990, pp n-87. ‘G.D. Johnson, ‘World trade effects of the dismantling of socialized agriculture in the former Soviet Union’, paper prepared for Annual Meeting of the International Agri- cultural Trade Research Consortium, Flor- ida, 1992.

only indicate the potential for productivity gain or loss conditional on the settings and effects of the other variables listed.

Although economists recognize that the appropriate measure of productivity is total factor productivity, that this should be measured at the margin, and that the only satisfactory measure of farm size is business size based on total output, nevertheless most discussions start from land productivity versus farm size measured as land area. This is understandable enough because it is the most accessible way to measure each variable, and it is also the way in which the political debate on land reform is conducted. We therefore begin with this relationship, but then describe a wider context in which many other factors are considered.

The conclusions of the last section were that the initial dichotomy in the distribution of land and holdings (between private plots and state cooperatives) will be redistributed to a more conventional unimodal skewed distribution (Table 4). This entails transfers of land from both tails of the initial distribution as family farms are created around the nucleus of the existing plots by withdrawing land from the state cooperatives, and as farming companies and private cooperatives are created from the land once farmed by the state cooperatives. Of course most of the redistributed land must come from the upper tail. Given that the land reform involves land transferring inwards from both extremes of the initial distribution it is important separately to consider the effects of the enlargement of the plots and the fragmentation of the state cooperatives. As this is done no distinction will be made between farming companies and private cooperatives, so the latter should be assumed to incorporate the former.

Economies of scale

Following Berry and Cline,6 the conventional wisdom for developing country agriculture is that when all inputs are correctly measured the production function exhibits constant returns to scale. In the West European developed country literature7 there is evidence of significantly decreasing costs as small farms grow to family-sized units, and very much weaker evidence of increasing costs for the largest size of farms. There is little evidence of the situation in pre-reform Central European economies (CEE). Estimation of the production (or cost) function is difficult in a situation where there can be no presumption that farms were operating on or near the function because of the lack of incentives. Notwithstanding this conceptual problem, Boyd estimated an aggregate production function for Bulgarian collectivized agriculture.’ Using a simple Cobb-Douglas function, he claimed to find significant economies of scale. However, given the weak conceptualization of the function, the omission of important variables (current capital inputs and the effect of weather - which significantly affected production in the early 1980s)) the aggregate nature of the data, the likely existence of collinearity which resulted in non-significant coefficients on labour and capital, and the simplistic estimation technique, this counterintuitive result cannot be taken as robust.

The general presumption is that Bulgaria went the furthest of the Central European countries in creating large agro-industrial complexes, and that these had grown well into the zone of decreasing returns with their massive overhead of management and their inability to reduce waste.’ This intuition, plus the slim evidence of rather low crop yields at each end of the spectrum, and Dovring and Dovring’s finding that



Figure 1. The yield-size relationship f in Bulgaria.

Based on plots and agro-industrial complexes.

10

a-

6

4 -

2-

I I I I I I I *

0 2000 4000 6000 8000 10000 12000 14000

Farm size (ha)

surplus labour in pre-war Bulgarian agriculture disappeared in farm sizes greater than 15 ha,l” suggests that it may be reasonable to assume that the West European findings are appropriate to the CEE situation. Thus the ‘farms’ at both ends of the spectrum are high cost. So, as land is merged with private plots to form family farms in what will hereafter be called the ‘enlargement’ group, there are increasing returns to be exploited. Similarly, as the large state cooperatives break up and land is withdrawn by new owners to form individual family farms, and as the remaining area is formed into private farming companies and cooperatives - the ‘fragmentation’ group - there will also be reducing costs.

The initial hypothesis is therefore that the underlying size- productivity relationship is as depicted in Figure 1. Purely for illustrative purposes this curve is calibrated as a quadratic in logs curve between wheat yield per hectare and ‘farm’ size for the two pre-reform observa- tions for plots and agro-industrial complexes and an arbitrary intermediate maximum point. The diagram serves to illustrate the immense scale, otherwise difficult to grasp, over which the Bulgarian land reform is operating. It also illustrates a second hypothesis, that the relationship between size and productivity is very flat over a wide range. This is certainly the West European experience. Another way of expressing this is that there is likely to be a good deal more variation in productivity within each size class caused by all the other factors considered below than between size classes.

Accepting this curve as the underlying technical relationship suggests that the land reform, which moves resources from the extremes of the distribution to intermediate positions, will increase productivity and hence output. However, there are many other factors which could modify this result. These are considered, following de Janvry, sequen- tially below. In each case relevant distinctions between the ‘enlargement’ and ‘fragmentation’ groups will be made.

Labour market dualism

The essence of this argument is that small peasant household farms have access to lower-cost labour than larger, labour-hiring farms. The smaller farms use relatively more labour per unit of land and therefore show

“‘F. Dovring and K. Dovring, Land and higher productivity per hectare, creating the so-called inverse rela-

Labor in Europe in the Twentieth Century, tionship between size and productivity. This provides a rationale for a Martinus Nijhoff, The Hague, 1965. redistributive land reform. There are three contributory factors to



labour market dualism: captive labour, lower transactions costs, and labour motivation and supervision.

Peasant households traditionally have access to three categories of captive labour, ie labour with low or zero opportunity costs: children, women and the elderly. In Bulgaria the first may not be important, but the second and third certainly are. The availability of these two categories of low-cost labour is therefore a potentially significant argument in Bulgaria. However, for the enlargement group, the growth of private plots averaging 0.4 ha to family farms averaging 5 ha will not be enough for the inverse relationship to have a significant effect. Family farms of this size are unlikely to utilize hired labour. Thus the potential for the inverse relationship to weaken the positive technical relationship exists, but its impact will be small.

For the fragmentation group there may be some scope for the inverse relationship to reinforce the technical presumption of cost reductions following structural change. Labour on the state cooperatives was contributed by ‘members’. It will now transpire that most of the original members also ‘contributed’ land. Of these landowners or their heirs, those still living in the countryside will be the main source of labour on the new private cooperatives. As the inevitable shake-out of labour occurs in Bulgarian agriculture a large share of this may be of landless labour, known in a market economy as hired workers. Thus there may be a tendency, as the new cooperatives are created, for more of the workforce to comprise captive labour.

Lower transaction costs embrace job search and transport costs, risk considerations and preference for working at home. These advantages enjoyed by peasant family labour contribute to the inverse relationship. Again they will have limited relevance in Bulgaria for the enlargement group. The size change is too small. They may be more significant for the fragmentation group. To the extent that former collective farm members revert to being self-employed peasants, they may enjoy some of these reductions in transaction costs. This effect, likely to be small, would reinforce the technical effect.

The third labour market argument holds that family labour who stand to benefit from farm profits will be more highly motivated and more productive than hired labour. This is not likely to be an important consideration for the enlargement group. Motivation was already high for those working plots. For the fragmentation group this motivation argument will be a very important reinforcement of the technical effect. At the ideological level this is the key source of expected improvements in productivity in CEE agriculture.

The supervisory argument suggests that if family labour provides supervisory input over hired workers, the effectiveness of this resource may diminish as the size of farm operation increases, thus contributing to the inverse relationship. This issue has a very different flavour in the Bulgarian context. State cooperatives had a highly structured workforce; managers and workers were motivated by the need to achieve targets, and by the opportunity to manipulate resources at their disposal to their own personal advantage. As this structure is demolished, initially there will be two counteracting effects. The stronger motivation of all concerned may lead to improved labour supervision and thus productivity. On the other hand, the lack of experience and clear management structures in the new cooperatives may result in a worsen- ing of labour control. On balance the combined effect of the changes in



labour motivation and supervision is likely to further reinforce the technical effect for the fragmentation group.

Costs of credit

A good deal of empirical analysis supports the theory that larger farm units who own more of their land have access to lower-cost credit than smaller or mostly tenanted farms. Such factors would thus work in opposition to the inverse relationship.

These issues are not the most relevant in the short run for Bulgaria. Credit in the previous system was rationed by the planning system, and its cost bore no resemblance to the opportunity cost of capital. Thus for all agriculturalists the most salient feature of the new situation is that the cost of capital will be higher in the future than in the past. In the first instance whether any particular group gets favourable access to capital will be determined by political considerations. Having launched the land privatization process there is a strong desire to ensure that emerging family farms are given the chance to survive, and thus they may be the recipients of schemes to subsidize credit or guarantee loans. It is recognized that because private plot owners were very dependent on capital provided (or taken) from the collectives they are highly dependent on access to credit to get equipped for farming their own small areas.

For farm operations created by fragmentation it is not reasonable to assume that, as farm size diminishes from large state cooperatives to smaller private cooperatives, credit will become harder to find and more expensive. Political and institutional issues are again likely to be important. There will be a strong desire to assist the establishment of private cooperatives; they too may be beneficiaries of credit subsidy or loan guarantee schemes. However, because of a scarcity of public funds for such schemes it is hard to imagine significant systematic effects. The precise distribution of the assistance may be related more to local political connections than to farm structure. Also, until the legal and institutional relationships for the structuring of private cooperatives have settled down, their size will not be as influential in securing easier credit than smaller family farms as theory suggests. Initially they will appear as conglomerations of highly fragmented land, and their managers will have a hard time persuading lenders that they really have effective collateral for loans. On the other hand, compared to the present state cooperatives which they are replacing, they will find credit easier to obtain and at lower cost. This results from the fact that the management of the state cooperatives since 1992, the Liquidation Councils, have strictly limited legitimacy in time and function and they are consequently devoid of collateral. Combined with the debts they have accumulated, they are a bad risk and in the absence of government intervention will continue to be starved of working and investment capital.

Thus, overall, the market cost of credit will come as a shock to all sections of Bulgarian agriculture. In the first instance there may be some relative cheapening of credit terms for the enlargers who are creating family farms from their plots plus land newly claimed. However, over time it can be expected that the more usual negative relation between cost of capital and farm size will emerge to the advantage of the private cooperatives. Thus as far as the effect of credit costs on the technical relationship between size and productivity is concerned, for the enlar-



gers it may reinforce it, and for the fragmenters it will certainly not counteract it. In time the larger units will have an advantage over smaller units in this regard.

Nature of new technology and investment

For all sizes of farm, land-saving technologies - fertilizers, crop protec- tion chemicals, new seed varieties and irrigation - may be negatively affected by the transition. This results, first, from their current high cost compared to the previous situation, and from the switch from the use of norms and physical rationing, where there were incentives for managers to acquire as much of these inputs as they could to try and exceed production targets, to the market mechanism. Second, because of the sheer uncertainty over the first three years of transition (1990-92) land utilization in agriculture has fallen and land is therefore not regarded as a scarce resource. Third, there is such widespread concern about the lack of labour-saving technology that this will receive most emphasis during transition. There are three reasons for this concern. First, Bulgarian agriculture has been consuming capital since the mid-1980s; all capital stock has been badly run down. Second, such capital as exists, for both crop and animal production, reflects the massive scale of farm operations and is therefore unsuited to the structures that are emerging. Third, much of the capital services used in farming the private plots was acquired from the collectives. This supply will certainly no longer be available free of charge and may not be available at all. As a result the emphasis of future technical change is likely to be on mechanization, plant and buildings.

Another factor influencing the size-productivity relationship is the pattern of adoption of new technology. The conventional wisdom, and empirical evidence in both developed and developing agriculture, point to the fact that larger farmers adopt sooner than smaller farmers.

In Bulgaria any systematic relationship between size and new technology adoption will not be very important. To the extent that it exists for the enlargement group it will reinforce the technical relationship. However, the range of farm sizes for this group is so small that the magnitude of this effect will not be large. For the fragmenting groups it is not reasonable to assume that the smaller units emerging from the state cooperatives will innovate less. The change in objective function and the availability of new technology will be more important determi- nants of the rate of adoption for this group than farm size.

In summary, these last three factors - credit availability, technical change and rates of technology adoption - taken together will not strongly affect the productivity gains expected to arise from the land reform. For the group of enlargers they will tend to reinforce the gains. For the group of fragmenters they will not counteract them.

“De Janvry, op tit, Ref 5.

De Janvry listed three other factors which tend to offset the inverse relationship between size and productivity.” These are land prices and rentals, which are generally cheaper for large parcels of land, and the ability of larger farmers to extract economic rents from the political system. These are not likely to be significant considerations in Bulgaria for some time to come. Land will not be transacted in large parcels because ownership will be very fragmented for some years. In the immediate future, small private farmers are likely to have most political


Other factors


weight, although as producer cooperatives emerge these may become the target for political support. Finally, it is often argued that the different objectives of farmers operating at different scales is a factor which could reinforce the negative relationship. This is not likely to be a big factor in Bulgarian conditions.

In short, in all cases the modifying factors either have little effect or they serve to strengthen the expected gain in productivity which can result from the land reform. The most significant factors will be labour motivation, the new orientation towards profit-maximizing behaviour of family farmers and managers of cooperatives, and the access to credit of larger farming units once the credit market becomes established.

Summary and conclusions

This paper has explored the possible effects of the dramatic reversion to private land ownership in Bulgaria. It is an exercise full of conceptual and empirical difficulty. The intention is to examine the possible effects of the land reform as far as possible in isolation from the other equally far-reaching changes in the economic and political circumstances of

Bulgarian agriculture. This alone creates a problem. If absolutely nothing else changed from the days of rigid central planning except that individuals were reallocated parcels of land over which they (or their ancestors) once had some claim, then there is little reason to expect any changes in productivity. The analysis reported here attempts to identify the potential for productivity gains resulting from the land reform, assuming that economic agents are free to respond in a rational, optimizing manner. There has been no attempt to consider the demand for any additional output which might result from productivity gains, domestically or abroad. What remains is an attempt to explore the factors which may be important in determining the effects of the land reform within the agricultural sector.

Two overall conclusions may be drawn. First, the land reform will result in a move away from the extreme polarization which characte- rized Bulgarian agriculture until 1990, but land will remain highly concentrated. The legacy of two generations of farm workers who have had no chance to exercise entrepreneurial skills, combined with the small scale of land holdings which result from the restored 1946 ownership pattern, the lack of profitability in farming resulting from the price and trade controls’* and the high degree of uncertainty created by an unstable macroeconomy, will result in a relatively small proportion (15-30%) of landowners seeking to set up family farms. Between one-half and two-thirds of land will remain farmed in relatively large blocks. The precise legal form of these farms is unclear; they will be associations of landowners - some absentee, some contributing labour - who may form private farming companies, or more likely producer cooperatives.

Second, the redistribution of land provides the possibility of significant productivity gains. These result from the enlargement of the intensively farmed private plots into small family farms and the fragmentation of the large state cooperatives into more manageable private cooperatives. It is argued that the labour market characteristics which

‘2PHAREIWorld Bank, An Agricultural conventionally point to a loss of productivity from farm enlargement

Strategy for Bulgaria, Technical Paper, will not apply in Bulgaria because of the narrow range of this enlarge- IBRD, Washington, DC, forthcoming. ment. This in turn is premised on the legal process which has been



initiated, and the former ownership pattern. All other modifying factors - farmer objectives, land prices, credit costs, the nature of technical change and rent-seeking behaviour - will either be neutral or tend to reinforce the potential for productivity gain.

From the point of view of Bulgarian food supplies and the creation of an internationally competitive agricultural sector, the most important group of farms will be the private farming companies or voluntary cooperatives created by the fragmentation of the involuntary cooperatives and collectives. There will doubtless be a range of sizes of these farms, but size will not be the most important factor in determining their productivity. Ultimately this will depend, as it does everywhere else in the world, on the motivation and skills of the managers. This suggests again that determination of the post-reform structure is less important than creating the right environment for whatever structure emerges to operate efficiently. Three particularly important aspects of this are: first, the creation of competitive produce marketing channels; second, enabling credit, machinery and equipment services to be provided privately and flexibly; and third, the promotion of management educa- tion and training.


potential implications for productivity of land reform in bulgaria

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