Political Economy of Public Policy

Distortions to Agricultural
Incentives in the Ukraine

16/11/08 Ag. Support Distortions in Ukraine

 Ukraine: outline

Strong potential for agricultural (especially
grain) production

Until 1991 was part of the Soviet Union

Before independence: central planed economy;
high reliance on state subsidies; production
increments of production “by decree”

After independence: lack of management skills;
old and inadequate infrastructures/technology;
undeveloped marketing systems
16/11/08 Ag. Support Distortions in Ukraine
 Overall Rates of Assistance

From 1992 to 2005, only in two years were the
Aggregate NRAs positive…

… And in only 3 of those years have the RRA been
positive for agriculture

Import substitutes receive high levels of assistance

Export products (grain, oilseed) are taxed

Pro-urban, anti-agricultural bias

In 2000 and 2003 the Ukraine turned from exporter to
importer of wheat
16/11/08 Ag. Support Distortions in Ukraine
Individual Rates of Assistance (2005)

Positive 
Negative
- Beef - Barley (#5)
- Egg (#12) - Maize (#14)
- Oat (#10) - Milk (#10)
- Pigmeat - Rye (#5)
- Poultry - Wheat (#11)
- Sugar Beets (#5)
Sources: World Bank; FAO

16/11/08 Ag. Support Distortions in Ukraine

Types of Market Distortion in Ag Policy

Export taxes/bans

Import substitute tariffs

Frequent policy over-reaction to market fluctuations

Overvaluation of currency

State controlled marketing of products and distribution
of agricultural inputs

Regional confiscation of produce and bans on exports

Low but heterogeneous tariff protection

Heterogeneous fiscal support
16/11/08 Ag. Support Distortions in Ukraine
 Sources of Market Distortion in Ag
Policy

Dispersed decision-making
- Ministry of Agriculture
- Other Ministries
- President's Special Powers

Parastatal/monopolist marketing systems

Large, influent bureaucracy (at national, regional and local level)

Rent Seeking

Corruption (local authorities/marketing companies/food processors/farm
managers)

Interest Groups/Oligarchs turned MPs

Lack of expertise in economics/management

Little development of Land Markets
16/11/08 Ag. Support Distortions in Ukraine
 The Iron Triangle: Interest Groups


Information/Agenda Control
- Focus on the relationship of Ukraine with the EU
and Russia

Large minority of ethnic Russians

Inefficient and state-dependent farmer groups
and food processor groups

Most of the influence is through direct
corruption and bribing of bureaucrats
16/11/08 Ag. Support Distortions in Ukraine
 The Iron Triangle: Bureaucrats

Bureaucrats are reminiscent of the Soviet-era
Nomenklatura

Regional and local bureaucrats have
disproportionate autonomy and power

Frequent bribing and corruption to favour local
food processors

Marketing systems are still under bureaucratic
control

Little or no management and economics
knowledge in present bureaucrats
16/11/08 Ag. Support Distortions in Ukraine
 The Iron Triangle: Politicians

Many oligarchs became MPs after the Independence

Frequent toppling of Governments; two blocs formed, one “Pro-
Western”, another “Pro-Russia”

These blocs use ideology to justify many political measures and
economic instruments

Socialist and Communist ideologies used to justify lack on reform in
land markets

Frequent overrides in agriculture policies, because of conflicting
decision-making

Ideology and caving in to (few) interest groups are the way Ukrainian
politicians decide on measures

This results in instability and frequent changes in policies as result of
small market fluctuations
16/11/08 Ag. Support Distortions in Ukraine