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1

Tajikistan Agriculture Sector: Policy Note 4 Institutional Reform: Public versus Private Responsibilities

Introduction - The Need for Reform The agriculture sector has yet to benefit substantially from policy reform. Sweeping changes to price and trade policy, production subsidies, financial institutions and land policy have not resulted in significant improvements to producer incentives or the behavior of markets for land, capital and agricultural products. Limited institutional change and low local level awareness of the implications of reform explain much of this weak response. Policies have changed but public and private institutions have not: newly established dehqon farms are run by former brigade leaders using pre-independence collective management systems; farmer decisions about what to produce, how to allocate their land and who to do business with are still controlled by local government, despite new laws which specify producers’ freedom to choose; and the privatization of cotton credit and processing has not increased competition or efficiency. Reforms designed to increase the market orientation of agriculture have been followed by an increase in subsistence production. Markets for farm inputs remain weak and output markets are easily saturated by increased marketed surplus. This lack of change reflects differing perceptions of public versus private responsibilities in the shift to market economies from former command economies. In Tajikistan, the re-definition of public and private sector roles in the provision of goods and services has been slow to occur; many of the public institutions responsible for implementing new policies still operate according to central planning principles, with production targets and coercion as the basis for planning and policy implementation. Local government structures and activities are particularly resistant to change. This policy note begins by summarizing the conceptual basis for deciding whether goods and services should be provided by public or private institutions. Drawing on these concepts, it then outlines the key roles of public institutions in a market oriented economy. Critical elements of current public and private sector activity in the agricultural sector are subsequently reviewed, and areas in need of change and reform are identified. The note concludes with a summary of the changes that relevant public institutions should make to enhance and strengthen their role in agriculture sector development. The Concept of Public versus Private Goods The basis for deciding whether goods and services should be provided by the public or private sector derives from the concept of public versus private goods. A public good is defined as a good that is hard or impossible to produce for private profit. This occurs when consumption of the good does not reduce the ability of others to consume it, and when it is difficult or impossible to limit access or use of the good. Goods which fit this definition are typically used collectively, e.g. national defense and roads. A private good is one that can easily be divided into parts and sold on the market, its owner can exclude others from using it, and once consumed it cannot be consumed again (e.g. a loaf of bread). These goods are best distributed through private sector market activity. Markets cannot be used to distribute public goods, however. Since there is no economic benefit to the provider, these markets are either very weak or completely absent. As a result, governments must assume the responsibility for providing these goods to meet demand, and generally provides for the costs of provision through taxation. The distinction between public and private goods is harder to make in practice than in theory. Many goods and services fall between these two categories. Policy decisions on whether or not to provide key services through public or private institutions depend on the type of good or service in question, the ability of private market activity to provide the service equitably and efficiently, and the level of development of laws and marketing activity. Advanced economies with better developed laws and competitive markets are able to provide a wider range of services through private delivery mechanisms. In less advanced economies more services must be provided by public institutions, but responsibility for these services can be transferred to the private sector as it becomes stronger and more efficient. The underlying principle remains the same however, that government should do better the things that only government can do, and avoid doing things that impede or should be done by the private sector.

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Areas for Reform of Public Responsibility As noted above, policy decisions on whether particular goods and services should be provided by public or private institutions were irrelevant under command economies, since all services were provided publicly. Changing this approach is a slow process as it requires not only changing the roles, structures and legal basis for public institutions, but also a new way of thinking for the people who operate them. The difficulty of making these changes is slowing the process of reform – particularly in the following areas. (1) Land Privatization and Use Land privatization has emerged as a pre-condition for successful agriculture sector development throughout the former Soviet Union. Farmer incentives to raise production increase significantly once they acquire the rights to use a particular piece of land as they wish. Their incentives to invest in this land and raise its production potential also improve substantially. The public institutions which influence land privatization and land use in Tajikistan continue to impede this transformation however, through the following practices: • The process of land privatization remains complex, non-transparent and expensive; and the

Government has done little to make it more accessible. Producers are poorly informed about the process and implications of land reform, and their new ownership rights, and have minimal recourse to the judicial system to protect and enforce these rights.

• Local governments have obstructed rather than supported land privatization through their representation on District Land Committees. Their involvement is currently a major obstacle for farmers wishing to leave the collective dehqons to create individual farms.

• Collective dehqon farms are still managed as they were before the reform, with decisions made by the farm manager while the other “owners” receive a farm “wage” derived from farm profits.

• In cotton growing areas local governments continue to coerce producers to allocate a high proportion of their arable land to cotton. Their power to do this derives from land laws which give them the ability to confiscate land used “inappropriately,” however defined.

These practices show that land ownership and use are still perceived as public goods, to be controlled by public institutions. Since the intent of land privatization is to make land use a private good, the roles of public institutions should be to: - create an accessible, transparent, low cost process of land privatization; - allow and encourage farmers to use their land as they wish; - improve the clarity of existing legislation and restrict public land appropriation to land required for legitimate public uses (roads, schools etc), accompanied by full compensation; Reinforcement of these legitimate public roles should be accompanied by termination of the current institutional roles played by local government, as described above. (2) Competition in the Cotton Sector Reforms implemented to promote private sector activity in the agricultural sector, and increase competition included price and trade policy liberalization, state withdrawal from marketing activities and the privatization of agricultural processing, agri-business and credit.. This should, in turn, facilitate improved efficiency and fair prices for farm inputs and output. Privatization of the cotton sector, however, has had the opposite effect; it has led to the creation of private monopsonies that restrict rather than enhance competition. In theory, the private sector gins and investors processing and marketing cotton provide an appropriate base for competition in the cotton sector, since they are numerous and well dispersed and no single operator dominates the market. In practice, however, local governments coerce producers to work with specific gins and investors, creating a system of local and regional monopsonies. This practice is reinforced by the power of the local government to restrict movement and transportation of cotton.

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Assured of raw material, ginneries have minimal incentive to raise their efficiency standards or to pay farmers a fair price for their cotton seed. Investors are able to exploit their position as sole suppliers of inputs and credit and as exporters. Investor and ginnery control of the procedures for certifying and weighing cotton for export further exploits producers. Local governments facilitate this monopsony activity because it ensures that the taxes generated from cotton grown in their locality accrue to them, and not somewhere else. These actions are highly detrimental to the cotton sector. An undue share of the cotton value chain accrues to ginneries and investors, farmers are deprived of a fair price for their output, and the cotton sector’s ability to compete on world markets is compromised. As a result, foreign exchange and export tax revenues have fallen. As with land use, this situation demonstrates the continued perception among local public institutions that the government’s role is to intervene in and control private sector economic activity. Until this perception changes, the benefits from competition will not be visible. Since cotton is a private good, government’s roles should be to promote competition between ginneries and investors, establish appropriate grading systems, monitor certification and weighing procedures, and develop appropriate pricing formulas for exports and taxation. The present role of the local government impedes growth, and is highly detrimental to agriculture sector development. (3) Market Activity The Government’s responsibility to facilitate and encourage private sector market activity extends beyond cotton, to all farm outputs and inputs. In Tajikistan, the markets for these commodities are weak and poorly integrated. Public institutions can and should engage in many activities, however, to improve competition, including the following: - Terminate unofficial “road taxes” imposed by police officers, which result in a significant increase in marketing costs; - Develop a public market information service to provide regular (daily or weekly) information by newsletter, radio or television on product prices in major regional markets; - Reduce the costs and delays associated with border transit procedures; - Intensify current efforts to create a low-cost, green corridor which gives improved access to Russian markets, and trade agreements with regional trading partners; - Modernize seed testing and certification regulations and procedures, and relax restrictions on the import and use of high-performing seed varieties from other countries; and - Revise and modernize product standards to be consistent with international standards, and phase in these new standards in a manner which the private sector can afford. (4) Research and Extension Prior to reform, agriculture research and extension was driven by the needs of large-scale, capital intensive agriculture with a high degree of regional specialization in production. The objective was to help producers maximize production rather than profits, and there was a heavy emphasis on plant and livestock breeding as the basis for increasing yields and productivity. Agricultural reform highlights the need for a different farming structure, and research and extension needs. Farms are now smaller, less capital intensive and more profit oriented, with less specialization. Research priorities must be re-oriented to reflect these changes, with a particular emphasis on applied research to identify: (i) low-cost crop and livestock management practices suited to small and medium-scale mixed farms, crop rotations and pasture management practices to improve soil fertility and reduce soil erosion, (ii) fruit and vegetable varieties which meet consumer tastes in domestic and export markets, and (iii) a greater emphasis on profits versus production. More emphasis and resources should be directed to improving livestock feeding and husbandry practices and less to livestock breeding. Poor nutrition and health are bigger constraints to livestock production than genetic potential. Agricultural extension should be modernized in association with these changes, with the aim to build stronger links between researchers and farmers, and to develop extension messages more relevant to current farm structure and issues.

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Re-Orienting Public Institutions In an economy such as Tajikistan, where private sector institutions are weak and reform still has far to go, the state retains major responsibilities. The financial and human resources of public institutions need to be focused on appropriate activities, however, consistent with the role of government in a market economy. The key responsibilities of the main public institutions associated with agriculture are summarized below. (1) Ministry of Agriculture The Ministry of Agriculture should focus its resources and activities on policy formulation, guidance on legislation and regulation, and the provision of essential public services in the areas of seed and plant protection, animal health, border control, food safety and product standards and certification. Policy formulation should be based on the preparation of a coherent medium-term sector strategy, which should then form the basis for Ministry input into budget preparation, public investment planning, and specific policies and legislation relating to land use and land reform, trade, taxation, market activity and competition, rural finance, research and extension. A stronger capacity for policy formulation is required to fulfill this responsibility, and a different approach to policy making – based on the principles of a market economy. Production targets should be discontinued as a policy instrument, and replaced with growth in value added, household income and export revenue. The efficiency with which essential public services are provided should also be improved, together with a comprehensive modernization of current regulatory practices (including product standards). Activities such as seed and livestock breeding should be transferred to the private sector, and more resources should be allocated to providing information and support to producers and agri-business on land privatization and market activity. (2) Ministry of Water Resources and Land Reclamation The Ministry of Water Resources and Land Reclamation should continue to focus on the planning, allocation and monitoring of water use by all sectors of the economy, the establishment and collection of water use fees, the maintenance of irrigation and drainage systems, and the regulation of water use and water users. Its approach to these roles and the means of implementation need to change: national water resource management should be based on river basins, water fees should be raised to reflect the true costs of water provision, and water users should assume more of the responsibility for water resource management through the expansion of water user associations. The ministry’s direct responsibility for maintenance should be terminated and this work should be contracted out.

(3) State Land Committee and Associated Agencies These public institutions should remain responsible for the cadastre, land mapping, land use classification, the issue of land certificates, and land privatization. However there is a need to change the State Land Committee’s (SLC) responsibilities and authority in order to accelerate land privatization. As part of a wider program of legislative and institutional reform, the SLC should be given broader powers and more resources to implement land privatization, including measures to improve farmer awareness and understanding of the privatization process and to increase the accessibility and transparency of relevant administrative procedures. The SLC should also sponsor legislative reform to ensure that private farm land can only be appropriated for legitimate public use, and ensure that local governments respect this new legislation. (4) Local Government Local government should focus on the provision of public services at oblast and rayon level, associated planning, and the imposition and collection of local taxes. All aspects of their current control of cotton production, processing and marketing should be terminated. These activities are outside the local government’s mandate to provide local services, and have become a major impediment to agricultural sector growth and the objectives of agriculture sector reform. Local government involvement in the land privatization process should also be reduced, and made more transparent and accountable to the State Land Committee. This will require a diminished presence on District Land Committees, and legislative reform to limit and clarify their powers for public land appropriation.

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The ability of public institutions to re-orient their activities is currently constrained by limited awareness of what is appropriate in a market economy, a reluctance to change old approaches, and a limited allocation of human and financial resources for policy formulation. Weak budgetary resources and a significant need to re-train staff and boost output are further constraints. Low salaries, corruption and rent-seeking behavior in public institutions make it even more difficult to change traditional practices – but it doesn’t reduce the need for change. Government will need to work closely with the international community to achieve these institutional reforms, particularly where they are likely to be blocked by vested interests.