the impact of land reform on rural household incomes in transcaucasia

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This article was downloaded by: [University of Birmingham] On: 02 October 2013, At: 19:48 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Eurasian Geography and Economics Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/rege20 The Impact of Land Reform on Rural Household Incomes in Transcaucasia Zvi Lerman a a The Hebrew University of Jerusalem Published online: 15 May 2013. To cite this article: Zvi Lerman (2006) The Impact of Land Reform on Rural Household Incomes in Transcaucasia, Eurasian Geography and Economics, 47:1, 112-123 To link to this article: http://dx.doi.org/10.2747/1538-7216.47.1.112 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms- and-conditions

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Page 1: The Impact of Land Reform on Rural Household Incomes in Transcaucasia

This article was downloaded by: [University of Birmingham]On: 02 October 2013, At: 19:48Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registeredoffice: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

Eurasian Geography and EconomicsPublication details, including instructions for authors andsubscription information:http://www.tandfonline.com/loi/rege20

The Impact of Land Reform on RuralHousehold Incomes in TranscaucasiaZvi Lerman aa The Hebrew University of JerusalemPublished online: 15 May 2013.

To cite this article: Zvi Lerman (2006) The Impact of Land Reform on Rural Household Incomes inTranscaucasia, Eurasian Geography and Economics, 47:1, 112-123

To link to this article: http://dx.doi.org/10.2747/1538-7216.47.1.112

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the“Content”) contained in the publications on our platform. However, Taylor & Francis,our agents, and our licensors make no representations or warranties whatsoever as tothe accuracy, completeness, or suitability for any purpose of the Content. Any opinionsand views expressed in this publication are the opinions and views of the authors,and are not the views of or endorsed by Taylor & Francis. The accuracy of the Contentshould not be relied upon and should be independently verified with primary sourcesof information. Taylor and Francis shall not be liable for any losses, actions, claims,proceedings, demands, costs, expenses, damages, and other liabilities whatsoever orhowsoever caused arising directly or indirectly in connection with, in relation to or arisingout of the use of the Content.

This article may be used for research, teaching, and private study purposes. Anysubstantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,systematic supply, or distribution in any form to anyone is expressly forbidden. Terms &Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions

Page 2: The Impact of Land Reform on Rural Household Incomes in Transcaucasia

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Eurasian Geography and Economics, 2006, 47, No. 1, pp. 112-123.Copyright © 2006 by V. H. Winston & Son, Inc. All rights reserved.

The Impact of Land Reform on Rural Household Incomes in Transcaucasia

Zvi Lerman1

Abstract: An agricultural economist specializing in the countries of the former Soviet Union(FSU) assesses changes in land use and their impact on rural incomes in Armenia, Georgia,and Azerbaijan. The paper compares developments in these countries with core CIS (Russia,Ukraine) and Central Asian states of the FSU. The author’s premise—that agriculturalgrowth, and hence higher well-being of the rural population are positively linked to individu-alization of farming structure and commercialization—is tested on the basis of survey resultslinking increases in farm size with higher rural incomes and accelerated sales of farmproducts. Journal of Economic Literature, Classification Numbers: Q15, Q18, Q24. 4 figures,4 tables, 19 references.

he countries of the former Soviet Union (FSU) embarked upon a transition from centralplanning toward more market-oriented approaches in order to increase the productivity

and efficiency of their economies. In a way, this represented a new strategy to achieve anolder objective—of “catching up” with the economically more successful West (if not “over-taking” it, as in Khrushchev’s days). But behind the macroeconomic and sectoral argumentsof improved productivity (one hopes) is the human objective of improving the standard ofliving of the common people. In this paper, I focus on changes in land use and theirimpact on rural incomes in a group of three small transition countries with a distinctly agrar-ian economies and relatively large rural populations, namely the three Transcaucasian statesof Armenia, Georgia, and Azerbaijan.

The paper begins with a brief profile of rural Transcaucasia in comparison with the coreCIS countries (Russia and Ukraine) and the agrarian countries of Central Asia. I thendescribe the three distinct modes of land reform in these regions and present sectoral evi-dence suggesting that agricultural growth, and hence higher well-being of the rural popula-tion, may be positively linked to individualization of farm structure. The last sectiondiscusses survey results indicating that increases in farm size lead to higher rural incomesand greater readiness to engage in the sale of the farm products, whereas commercializationof farm activity also generates higher household incomes. I conclude the paper by brieflyoutlining policy implications.

The data for the following analysis derive from official country statistics reported in CIS(2005) and a number of farm surveys conducted in Transcaucasia by the World Bank as well

1Professor, Department of Agricultural Economics and Management, The Hebrew University of Jerusalem,Rehovot, Israel. The author acknowledges the comments by the journal’s editors and an anonymous referee.

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as the Hebrew University of Jerusalem (HUJ) with financial support from USAID/CDR.2Literature references are provided when survey findings have been published; unpublishedsurveys are identified by sponsor and date.

BRIEF AGRICULTURAL PROFILE OF TRANSCAUCASIA

Armenia, Georgia, and Azerbaijan are mountainous countries, with a large part of agri-cultural land in green mountain pastures and about 40 percent suitable for cultivation. Theclimate ranges from warm, almost Mediterranean, in the coastal plains and in the valleys, tosevere in the snowbound mountains. In the Central Asian countries, on the other hand, theclimate is arid, most of the agricultural land is in desert pastures, and arable agriculture isconfined to a mere 20 percent of land. Russia and Ukraine, by virtue of their enormous size,span a whole gamut of climatic conditions from arctic to Mediterranean, with most of thelandlocked territory characterized by extreme continental climate.

Table 1 compares the Transcaucasian countries with Russia and Ukraine (“core” CIS)and their neighbors across the Caspian Sea—the five Central Asian countries. Georgia,Armenia, and Azerbaijan are small countries, with a total population of only 16 million in2004. The rural population in these countries comprises around 40 percent of the total, whichis less than in Central Asia (where nearly 60 percent live in rural areas) but substantiallyhigher than in Russia and Ukraine (30 percent). The large rural population in combinationwith the relative scarcity of cultivable land combine to produce a high population density perhectare of good, productive land.

Transcaucasia is much more agrarian than Russia and Ukraine in terms of the the share ofagriculture in GDP and in total employment, and it is comparable by these measures to Cen-tral Asia. In Azerbaijan, with its well-developed oil and gas sector, agriculture is relatively

Table 1. Selected Agricultural Indices for Transcaucasia and Other FSU Regionsa

Indicator Armenia Georgia Azerbaijan Central Asia

Russia, Ukraine

Population, mill. 3.4 4.4 8.2 56 193Rural population, pct. 35 48 49 60 30Agricultural land, mill. ha 1.4 2.9 4.6 154 234Cultivable land, pct. 43 40 37 20 67Cultivable land per rural resident, ha 0.5 0.5 0.4 0.9 2.7Agriculture in GDP, pct. 24 20 14 23 9Agriculture in total employment, pct. 43 47 36 45 18GNP per capita, US$ 950 770 820 774 1,790aAverages for 1999–2004.Sources: Compiled by the author from CIS, 2005 and WDI, 2005.

2All surveys are essentially based on a uniform methodology originally developed by the World Bank in 1992for the first farm-level surveys in Russia and Ukraine (see Brooks and Lerman, 1994; Lerman, Brooks, and Csaki,1994). The survey data are always collected in structured face-to-face interviews using comprehensive question-naires that cover a wide range of topics. The samples typically include 1000 to 2000 respondents selected by randomsampling methods across the country. Further details can be found in Lerman and Mirzakhanian (2001) for Armenia,Dudwick et al. (2005) for Azerbaijan, and World Bank (1996, 1998) and Gogodze and Kimhi (2005) for Georgia.

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less important to the economy than in Armenia and Georgia, but nevertheless nearly one halfof its population is rural. With a per capita GNP at around $850 (U.S.), the Transcaucasianstates are slightly better off than Central Asia, where the per capita GNP is below $800. How-ever, they are poor when compared to Russia and Ukraine, not to mention Western Europe.

THE LAND REFORM AND TRANSITION TO INDIVIDUAL AGRICULTURE

During the Soviet era, agriculture was characterized by absolute state ownership of allagricultural land and concentration of production in large collective farms. These two fea-tures are generally counted among the main reasons for the inefficiency of socialist agricul-ture, because in market economies land is typically in private ownership and production isdominated by relatively small, family-operated units.3 Land reform programs in all transitioncountries were designed to correct these deviations from the market pattern, and theirachievements are usually assessed by examining the extent of privatization of land owner-ship and (perhaps more importantly) the extent of individualization—i.e., the transition fromtraditional large-scale collectives to smaller family farms.

The former socialist countries in transition (23 states in Central and Eastern Europe andthe FSU) made different land reform choices from the start. While most Central and EasternEuropean countries and the Baltic states restituted land that had been nationalized undersocialist regimes to its pre–World War II owners, the CIS countries (Transcaucasia included)privatized land to current users, i.e., practically to the entire rural population. A distinctivefeature of land reform in the three small Transcaucasian countries is the full acceptance ofprivate land ownership and the complete transition to individual farming, accompanied bythe virtual elimination of large corporate farms. In Russia and Ukraine, on the other hand,land was privatized in the early 1990s, but privatization took the form of paper shares andhas not been followed by mass distribution of physical plots to individual land owners. As aresult, widespread privatization of agricultural land in these countries has not led to commen-surate individualization of agriculture, and both Russia and Ukraine continue to emphasizelarge corporate farms, which control the bulk of agricultural land.

Transcaucasia is characterized by two different submodes in its transition to individualagriculture. Armenia and Georgia completely individualized their farm structure as early as1992–1993, whereas Azerbaijan delayed its land reform until about 1995–1996, when itbelatedly recognized private land ownership and began to distribute paper certificates of enti-tlement (“land shares”), rather than actual land plots, to the rural population. The conversionof land shares to physical plots came in 1997–1998, and since 2001 the farm structure inAzerbaijan has closely resembled that in Armenia and Georgia.4

The individual sector in Transcaucasia currently produces almost 100 percent of agricul-tural output, up from 30–40 percent before 1990 (Table 2). The share of individual productionin Transcaucasia is substantially higher than in Russia, Ukraine, and Kazakhstan, where theindividual sector accounts for 60–70 percent of agricultural output, up from 25–30 percent

3Ownership of land is to be distinguished from use of land for farming. Farms in market economies use theirown private land as well as private land leased from other landowners. Private landownership in market economiesis thus divided between active landowners—those who cultivate their own land, and passive landowners—thosewho prefer to lease out their private land to other operators. For a broader exposition and discussion, see Lermanet al. (2004) and Lerman (2004).

4The “share conversion” strategy adopted by Azerbaijan is reminiscent of what is occurring in Moldova(another small CIS country) since 1998, and also in Ukraine since about 2002, but with different outcomes.

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before the transition. The shift of production to the individual sector is a reflection of thedramatic increase in the land holdings of rural households. Prior to 1990, only 4 percent ofagricultural land, on average, was in individual use in the Soviet republics. A decade later, in2000, more than one-third of agricultural land (or nearly 70 percent of arable land) is inindividual use in Transcaucasia, compared to ca. 15–20 percent in Russia, Ukraine, andKazakhstan.

AGRICULTURAL PERFORMANCE

The numbers in Table 2 suggest that in each country the individual sector is much moreproductive on average than agriculture as a whole. The share of individual farms in overallagricultural output is roughly three times its share in cultivated land.5 This phenomenon,however, is not an outcome of the new land policies during transition, as is clear from thepre-transition data for 1990 in the same table. Have the unique land policies in Transcaucasiahad a positive impact on agriculture? To answer this question, we must first examine changesin agricultural performance in Transcaucasia and compare them to corresponding changes inKazakhstan, Russia, and Ukraine.

Figure 1, from CIS (2005), shows changes in agricultural output in Transcaucasia since1990. Armenia individualized its agriculture swiftly and comprehensively beginning inMarch 1991; there was practically no decrease in agricultural production following the disin-tegration of the Soviet system, despite the war with Azerbaijan and the aftermath of the 1989earthquake. Armenian agriculture thus shows a clear upward trend over the entire periodsince 1992–1993.

Table 2. Agricultural Land in Individual Use in Transcaucasia and Other FSU Regions, 1990 and 2000 (in percent)

Country

1990 2000

Agricultural land in

individual use

Share of agricultural

output in value terms

Agricultural land in

individual use

Share of agriculture output in

value terms

Relative productivity of

land in individual usea

Armenia 4.0 35 33 98 3.0Georgia 7.0 48 37 94 2.5Azerbaijan 3.0 35 34 96 2.8Kazakhstan 0.2 28 21 75 3.6Russia 2.0 24 13 57 4.4Ukraine 7.0 27 18 60 3.3a Ratio of the share of agricultural output to the share of agricultural land in individual use. This value is 1 foragriculture as a whole. Values greater than 1 imply greater productivity than the average for the entire sector.Sources: Compiled by author from Lerman et al., 2004, p. 113 and CIS, 2005.

5These very rough comparative measures of land productivity are methodologically not appropriate for com-parisons across countries: they should be used only within a single country for comparison to the average productiv-ity of the agricultural sector in that country.

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Georgian agriculture collapsed in 1991, when the entire country was in total disarray andfacing a bitter civil war.6 Land was then quickly distributed to rural households in an attemptto avoid famine. This desperate goal was achieved, as Georgian agriculture quickly recov-ered in 1993–1995. The recovery raised the volume of agricultural production in recent yearsby 25–30 percent above its nadir in 1993, yet the initial collapse was so dramatic that agricul-tural output today is still 40 percent below the level in 1990.

Azerbaijan also experienced an initial decline of agriculture following the disintegrationof the FSU. The decline continued until 1995, a couple of years longer than in Georgia.Recovery came only in 1997, just as Azerbaijan embarked on a mass conversion of paperland shares into physical plots for rural households. Between 1997 and 2004, the index ofagricultural output in Azerbaijan rose by 65 percent, the pace of growth in Armenia.

Agricultural performance in Russia, Ukraine, and Kazakhstan presents an entirely differ-ent pattern (Fig. 2, based on CIS, 2005). In these countries, agricultural output exhibited asteady downward trend throughout most of the 1990s, with the first signs of modest agricul-tural recovery appearing only in 1998–1999. Despite the absence of war, major civil upheav-als, or natural disasters, agricultural output in these three countries in 2004 remains40 percent below the 1990 level, comparable to Georgia and much less than in Azerbaijan,both of which recovered from a traumatic initial collapse. Stated differently, Russia, Ukraine,and Kazakhstan attained their present low level of agricultural production following a down-ward path of continuing decline, whereas Georgia and Azerbaijan are now on an upwardtrajectory from a deeper abyss.

Another relevant example is provided by Turkmenistan, where both agriculturaloutput and GDP declined sharply after 1990, but signs of recovery appeared in 1997–1998

6I refer here to the run-up to violent civil conflict in the streets of Tbilisi in late 1991–early 1992 between sup-porters of the country’s first post-Soviet president, Zviad Gamsakhurdia, and an opposition faction in the GeorgianNational Guard.

Fig. 1. Gross agricultural output in Transcaucasia, 1990–2004 (aggregated value in constantprices, 1990 = 100).

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(coincidentally with the introduction of individual leasehold arrangements in agriculture).The new leasehold contracts transferred land use rights from large collectives to rural fami-lies, although land continued to be owned by the state and the leaseholders continued to bebound by production and delivery targets for wheat and cotton (Lerman and Stanchin, 2004,pp. 70-71). Although one may hope that the incipient recovery is indeed linked with theimpact of agricultural reforms, the data for Turkmenistan are incomplete, and only the futurewill demonstrate if this is the case.

The data are still insufficient to rigorously establish a causal relationship between indi-vidualization of land and agricultural growth. However, we cannot ignore the strong evi-dence of Figures 1 and 2: in Transcaucasia agriculture recovered roughly in concert with thesweeping individualization of land, and in Turkmenistan recovery coincided with the intro-duction of the individual leasehold system, while in Russia, Ukraine, and Kazakhstan, wherelarge corporate farms still dominate agriculture, agricultural output continued to decline untilvery recently. This conclusion is borne out by an analysis of all 23 transition countries, whichshows a strong association between agricultural growth since 1992 and the share of land inindividual use (Lerman et al., 2004).

FARM SIZE AND COMMERCIALIZATION OF INDIVIDUAL FARMING

While individualization appears to encourage agricultural growth in transition countries,this process has a downside in that it inevitably produces fragmentation of land holdings—especially in situations where land allocation is based on universal and equitable principles.In Transcaucasia (similarly to Albania, for instance) land was distributed free of charge to theentire rural population. The universality of the process necessarily imposed size limits on theamount of land that an individual or a household could receive. In Armenia, land was allo-cated in fixed units calculated by dividing the total available land in the village by the totalpopulation. In Georgia, rural families actually engaged in agriculture (i.e., families of collec-tive-farm workers—the majority of the population in the villages) were entitled to receive up

Fig. 2. Gross agricultural output in Kazakhstan, Russia, and Ukraine, 1990-2004 (aggregatedvalue in constant prices, 1990=100).

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to 1.25 hectares, while the actual allocation was determined by local availability of land. InAzerbaijan, the land held by the local collective or state farm in each village (or cluster ofvillages) was equally distributed among all rural residents, regardless of occupation or age.The universal process of land distribution, coupled with scarcity of cultivable land, naturallycreated a large number of small individual farms in Transcaucasia. The average individualholding is between 1 and 2 hectares.7 In Armenia, only 12.3 percent of individual farms usemore than 2 hectares; in Georgia, this category accounts for 4.6 percent.8 Transcaucasianindividualized agriculture is thus essentially an agriculture of smallholders.

Small farms typically generate small incomes. Although they provide a reliable sourceof food and possibly cash in times of adversity, they may trap the rural population in chronicpoverty. Analysis of survey results in all transition countries clearly shows that familyincome (including both farm and off-farm components) rapidly increases with an increase inthe area of land holdings. This effect is demonstrated in Figure 3, based on a 2003 survey offarm households conducted by the Hebrew University of Jerusalem in Georgia. The level ofincome reported by families with 5–10 hectares of farmland is double that reported by fami-lies possessing 1–2 hectares. It is mainly the farm component of family income that increaseswith farm size, while the off-farm components (outside salaries, pensions, etc.) remain fairlystable. Land markets and readiness to engage in land transactions are standard mechanismsfor achieving larger farm sizes and thus increasing family incomes.

In agriculture, smallness is usually interpreted as being synonymous with subsistencefarming (e.g., see Abele and Frohberg, 2003). Yet the small individual farms in Transcauca-sia are far from being pure subsistence operations. In recent farm-level surveys, a high per-centage of respondents (64 percent in Georgia, 80 percent in Armenia, and 87 percent inAzerbaijan) reported selling at least some of their products, and the average individual farm

7The actual averages range from 0.96 hectares in Georgia to 1.38 in Armenia and 1.86 ha in Azerbaijan (CIS,2005).

8Based on official country statistics cited during personal communications with officials in the relevant coun-tries.

Fig. 3. Family income versus farm size in Georgia.

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in these countries sells 40 percent of its output (Table 3). Moreover, as is apparent fromTable 3, this phenomenon is not restricted to Transcaucasia, and small household plotselsewhere in CIS are characterized by significant levels of commercialization. Althoughindividual farms in transition countries certainly remain far from the level of commercializa-tion typical of market economies, their commercial activities are nonetheless not negligible.On the whole, the picture that emerges from Table 3 is definitely different from the tradi-tional view of subsistence agriculture.

Agricultural policies obviously should strive to avoid the “subsistence trap” and encour-age commercialization of individual farms. Sales of farm products keep the urban populationsupplied with food and thus extend the benefits of farming outside the rural communities. Itis therefore important to identify the determinants of the decision to sell farm output amongindividual farmers. Table 4 presents the comparative profiles of “seller” and “non-seller”farms in Armenia. The sellers are characterized by larger land holdings, a larger amount offertile irrigated land, and a greater number of animals. Sellers also command a larger pool ofpotential family labor, and the head of the household works full time on the family farm in asignificantly higher percentage of cases. Finally, sellers allocate much greater sums of moneyto payment for mechanical field services (both in absolute terms and on a per hectare basis).Interestingly, some variables that a priori would appear relevant to the decision to sell are notsignificantly different between the two categories of households. For example, average dis-tances to the main delivery location or point of sale and average road conditions are virtuallyidentical for sellers and non-sellers, and the product mix is practically the same. Neither isthe educational endowment strikingly different. The picture emerging from Table 4 also isconfirmed by logistic regression: the probability that a household is a “seller” increases withan increase in the size of its land endowment, the number of animals, the number of familymembers, and the number of farm workers per hectare.

In a broader regional analysis, the specific profile components and regression resultsvary from country to country, reflecting local differences and the differential availability ofparticular variables (e.g., land). Yet farm size as measured by land area emerges clearly andconsistently in all countries as the major determinant of the decision to engage in sale of farmproducts. This has been shown by the author’s studies of CIS countries and by Mathijs andNoev (2002) for individual farmers in four transition countries in Central Eastern Europe.

Table 3. Level of Commercialization in Individual Sectors (percent)

Country Year of survey

“Sellers” as pct. of total

Share of total output sold by “sellers”

Armenia 1998 80 40Georgia 1996 64 40Azerbaijan 2003 87 46Moldova, small private farms 2000 83 48Moldova, household plots 2000 60 31Ukraine, household plots 1998 60 50Belarus, household plots 1999 76 22

Sources: Compiled by the author from Lerman and Mirzakhanian, 2001 for Armenia; World Bank, 1996for Georgia; Dudwick et al., 2005 for Azerbaijan; Lerman, 2001 for Moldova; Lerman and Csaki, 2000 forUkraine; and Csaki et al., 2000 for Belarus.

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Seller farms are larger and use greater inputs of productive resources. They accordingly pro-duce more output and have a greater saleable surplus after satisfying the family’s consump-tion needs. Small farms produce just enough to satisfy family consumption and do not trade.To have saleable surplus output, the farm must be larger than a certain minimum size.

In transition countries, the level of commercialization is generally observed to increasewith farm size. This effect clearly emerges in Georgia from the results of two World Banksurveys (World Bank, 1996, 1998). The 1996 survey was based on a representative sample of2,000 individual farms, with an average size of 0.75 hectares. The 1998 survey focused on1,200 relatively large individual farms averaging 62 hectares in size (of which 61 hectareswas leased land). The small individual farms (1996 survey) reported selling 40 percent oftheir output, whereas the large individual farms (1998 survey) sold 70 percent of their output.Among the small individual farms 64 percent reported sales, whereas among the large indi-vidual farms virtually all (98 percent) reported commercial sales of products. In the HUJ2003 survey in Georgia, the probability of being a “seller” (i.e., of selling at least some of thefarm output) was observed to increase with farm size. The probability of engaging in com-mercial activity is about 0.7 for very small farms of up to 1 hectare in size and approaches 1.0for relatively large farms of 50 hectares and more.

The very fact that sellers engage in additional income-generating commercial activitiesleads to a striking difference in the level of family income. In Armenia, “sellers” report anaverage cash income of 216,000 dram ($430 per year), while “non-seller” households earnless than half this amount (103,000 dram or $210; see Table 4). The entire difference isattributable to sale of farm products, as off-farm income and unearned income (pensions,transfers, etc.) are on average equal for the two categories of rural households. If householdincomes are adjusted for the value of own consumption of farm products,9 the percentage gap

Table 4. Characteristics of Sellers and Non-Sellers in Armenia, 2003

Sellers (N = 1,104)

Non-sellers (N = 264)

Land, ha 2.3 1.4Irrigated land, ha 0.44 0.24Animals, standard head 2.2 1.0Family size 5 4Number of farm workers 4 3Full time occupation on farm, percent 63 45Annual cost of mechanical field services, dram/ha 19,500 8,900Product mix, percentage of crops 60 59Educational endowment of head of householda 72 74Household cash income, current dollars 430 210aPercentage with a secondary education or higher.bHousehold cash income was calculated separately from the 1998 rural household survey in Armenia.Sources: Compiled by the author from Lerman and Mirzakhanian (2001, p. 40) and 1998 rural household surveyin Armenia.

9The value of own consumption is estimated at 445,000 dram ($890) for the average household (see Lermanand Mirzakhanian, 2001).

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shrinks to 20 percent, but the absolute difference (over $200) is preserved. Recent householdsurveys in Azerbaijan indicate that “seller” households earn incomes that are 8 percenthigher than the incomes of “non-sellers” (Sedik et al., 2002). This figure is based on house-hold income that includes the value of own consumption of family-produced food andderives from a regression analysis that controls for many additional factors not consideredfor Armenia. The findings of the HUJ 2003 survey in Georgia presented in Figure 4 showthat “commercial” households (i.e., households selling some of their farm products) earnincomes that are double the income of “subsistence” households (i.e., households where theentire farm output is consumed by the family). Most of the difference in household incomesbetween “sellers” and “non-sellers” is attributable to cash revenue from the sale of farmproducts. The same pattern is observed consistently in all transition countries. Figure 4 alsohighlights the fact that the “seller” farms (averaging 2 hectares in the survey) are signifi-cantly larger than the “non-seller” farms (1 hectare only). Survey results for other transitioncountries also indicate that sellers enjoy higher total incomes, and the difference is basicallyattributable to cash earned from sales of farm products.

The importance of the farm for family welfare thus is markedly enhanced with a rise inthe level of commercialization, which, as this paper has shown, increases for larger farms.Individual farmers apparently recognize the advantages of operating a larger farm, as our sur-veys in transition countries reveal a clear pattern of willingness to increase the farm size. InArmenia, 20 percent of individual farmers expressed a desire to double their land holdingsfrom 2 hectares to 4 hectares (Lerman and Mirzakhanian, 2001). In Georgia, half the respon-dents (World Bank, 1996) indicated that they would like to treble the size of their farm from0.9 hectares to 2.7 hectares. Respondents seeking to enlarge their farm typically justify theirintention by indicating that “a small farm produces insufficient income,” or “small farms areunprofitable.”

Fig. 4. Family income for “sellers” and “non-sellers” in Georgia.

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Page 12: The Impact of Land Reform on Rural Household Incomes in Transcaucasia

122 EURASIAN GEOGRAPHY AND ECONOMICS

CONCLUSION

This paper has attempted to demonstrate two main points. First, the transition to individ-ual (as opposed to corporate) farms is conducive to agricultural growth and thus potentiallyincreases the well-being of the rural population. Second, within the sector of relatively smallindividual farms, larger holdings lead to greater commercialization and thus to higher familyincomes—both directly due to increased production, and indirectly as a result of additionalrevenue from sales.

The policy implications for rural poverty seem clear. Land should be distributed to therural population, and not hoarded in large corporate farms in pursuit of the often illusory goalof maximizing efficiency. Governments also should support the supply side of land marketsby unblocking large state reserves of land. In this regard, the 2001 Land Code of Armenia,which makes specific provisions for the auctioning of state-owned arable land to private indi-viduals, is definitely a step in the right direction. However, attention to land allocation,although necessary, is insufficient if not undertaken in parallel with policies designed toovercome land fragmentation and smallness, problems that inevitably accompany wide-spread land redistribution in rural areas. Poverty alleviation requires overcoming the “subsis-tence trap” of small-scale farming and developing a stronger commercial orientation. Thiscan be achieved by encouraging the development of land markets and investing in rural infra-structure and services, which include farmer-owned service cooperatives. By helping thefamily farms overcome the constraints of extreme smallness, such as quality control, compli-ance with international standards, and other marketing difficulties, these institutions wouldultimately have a positive impact on the ability of the three countries to compete in inter-national food markets.

The two policy directions are closely interrelated, because investment in rural infrastruc-ture and services, in addition to enabling farmers to sell more, will also have an indirecteffect. Prudent investment creates off-farm employment opportunities in rural areas, thusenabling some people to stop farming for subsistence purposes and put their land on the mar-ket—either for sale or for lease. Off-farm job opportunities and land markets will encouragethe enlargement of family farms; larger farms will generate saleable surpluses; infrastructureand service channels (including agroprocessing) will enable farmers to convert their sur-pluses into cash; and cash revenues will ultimately increase household incomes and familywelfare.

An additional observation is suggested by the analysis of leasehold-based reforms inCentral Asia. Although the transition to leasehold arrangements in Turkmenistan andUzbekistan is definitely a move toward greater individualization of farming, survey resultsshow that the productivity of leaseholds is substantially lower than that achieved by the samefamilies on their household plots (see, e.g., Lerman and Stanchin, 2004, pp. 69-70). In ourview, the only possible explanation lies in the different incentives attributable to the sharpdifferences in institutional production and marketing arrangements between household plotsand the leasehold sector. Leaseholders are strictly bound by state orders, and there is notmuch room for private initiative in their production and marketing decisions. The householdplots, on the other hand, are not subject to these restrictions, and private initiative contributesto their success. In order to enable the rural population to reap the benefits of individualiza-tion, agricultural policies in Armenia, Georgia, and Azerbaijan would need to promote free-dom in production and marketing decisions at the farm level, and thus create incentives formaximizing private initiative.

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ZVI LERMAN 123

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