Friday, 27 August 2010

Stalin's Harvest

Poor wheat harvests in Russia and Ukraine, along with devastating wildfires in Russia, have resurrected fears of a global food crisis. Some have blamed global warming for inducing a severe drought. But the real blame rests with poor agricultural performance over the long term in a region still hampered by communist experimentation.
To react by banning exports, as Moscow has done and Kiev is considering, would be counterproductive. Combined with restrictions on the use of modern agricultural technologies imposed in the European Union and being proposed in the U.S., such bans really could lead to a global food crisis.

After the Russian revolution in 1917, the Bolsheviks socialized all agricultural markets. Although they directed their rhetoric against "middlemen," their real aim was to squeeze farmers by paying them below-market prices and use the proceeds to finance state-owned industry.

This "New Economic Policy" backfired spectacularly as farmers fed grains to livestock, or converted them into liquor and then sold both on the black market, thereby evading the Bolsheviks' price controls.

Stalin dealt with such evasions first by denigrating independent farmers as greedy kulaks (the Russian word for fist) and then by starving them to death. As Soviet agriculture was collectivized and crops and livestock were confiscated, millions of peasants died. Russia and Ukraine have yet to recover fully from this assault on the countryside.

The contrast with China is stark. In the late 1970s, millions of peasants who had survived agricultural collectivization and Mao Zedong's "Great Leap Forward" two decades earlier responded to his death by becoming entrepreneurs.

In village after village, property was informally privatized. Output exploded, ensuring that attempts at sanctioning this illegal activity were carried out half-heartedly. Deng Xiaoping subsequently legitimized these bottom-up reforms in what became known as the "Household Responsibility System," which provided a major catalyst for China's modern economic take-off.

During the 1980s, Mikhail Gorbachev attempted similar reforms in Russia, but from the top down. These were not successful. After more than half a century during which entrepreneurship had been repressed, who would dare take the risks associated with farming and agricultural marketing?

In spite of the collapse of communism, it has been difficult to convert Stalin's collectives into private farms. Although most of the farming industry is privately managed, rural property rights are poorly defined and access to commercial credit is limited.

Also, bankruptcy law is ill-developed, which impedes the liquidation of inefficient operations and the transfer of real estate and other assets to efficient managers. All these factors undermine incentives to invest in productivity-enhancing technologies and good management. Former collectives are also subsidized, warping incentives further.

Fertilizer applications on Russian farms currently average 11 kilograms per hectare, which is below the amount needed to compensate for crops' uptake of nutrients and is similar to levels in sub-Saharan Africa. As a result, soil fertility is declining with each passing year.

Predictably, cereal yields in Russia (1,865 kilograms per hectare) are barely a quarter those of the United States (typically 7,000 kilograms per hectare or more), and similar to U.S. yields before the 1930s, when farmers began using hybrid seeds and synthetic fertilizer.

Russia and Ukraine have the potential to be far more productive, but to do so their governments must provide the right incentives to farmers to invest in land improvements and to use modern seed, fertilizer and pesticides. That means removing barriers to ownership and exchange.

Banning exports has the opposite effect, curtailing farmers' existing markets, then their incomes, then their incentives to invest, all of which would further reduce their low output.

World supplies of grains are also adversely affected by the EU's restrictions on the use of biotechnology and pesticides. In addition to limiting production in the EU, these restrictions also spill over into exporting countries.

Russian and Ukrainian producers, for instance, worry about falling foul of EU rules and so have additional reasons not to adopt beneficial yield-enhancing technologies.

To make matters worse, the U.S. Environmental Protection Agency seems to be following the EU's example and is seeking to restrict a number of widely used agricultural chemicals.

One of these is atrazine, a weed-killer that has been applied for more than four decades with no observable ill effects, and which the EPA itself reapproved four years ago. Such restrictions would further undermine global crop output.

Americans are accustomed to availing themselves of plentiful food at affordable prices, which most take for granted. But there is no such thing as a free lunch in the food economy.

Removing the inputs that make bountiful harvests possible will inevitably drive up prices and, as the experience of Russia and neighboring countries demonstrate, place the world at risk of shortages.

No comments: