Academic journal article
By Bezemer, Dirk J.
Journal of Economic Issues , Vol. 36, No. 3
The change we observe is seldom discontinuous.
One of the surprises in the post-socialist transformation process in Central and Eastern Europe has been the persistence of production structures in the agricultural sectors. Amid the dramatic and sudden changes that ended the continuity of the Central and Eastern European socialist economies, the observation made by Douglass North which serves as the motto of this article remains true for the structure of farms in large parts of the region.
Socialist farms were either collective or state farms, both of which were corporate organizations. There were separations between farm ownership, control over the production process, and implementation of production tasks. These were wage-labor farms, as distinct from the Western-type family farm. In the Western agricultural economics literature preceding the liberal revolutions of 1989-1991 in the region, socialist agriculture had long been identified as cost-inefficient due to incentive problems inherent in the governance structure of wage-labor farms. This view was also the dominant approach in the early transformation years and is expressed explicitly and in most detail in a paper by G. Schmitt (1993), originally written in 1990. The argument was an application to post-communist farming of theoretical work on household production by R. Pollak (1985). For contemporary expositions of it, see Sarris et al. 1999 or Swinnen and Mathijs 1999 (4-8).
In these accounts, the raison d'etre for collective, large-scale production is the existence of economies of scale or scope. However, in most of the socialist economies, farms had a number of workers far exceeding the number of workers on the farms on which generalizations about scale and scope economies are based (Pryor 1992, 147). In addition, in much of agriculture, technical economies of scale and scope were argued to be soon outweighed by diseconomies in the organization of production, and particularly of labor (Ferenczi 1994, 403). The alleged cause is, in the spirit of A. Alchian and H. Demsetz' (1972) approach, a rapid increase in monitoring costs with number of employees. These costs arise because of the information asymmetry problem between managers and workers with regard to the state of the land, crop, and animals, and the amount of labor input required and actually applied.
This asymmetry precludes the use of adequate incentives and necessitates more supervision. However, supervision is costly because food production processes are characterized by sequential and interdependent jobs, seasonal work and labor peaks, and the spatial dispersion of farm work. For these reasons, the farm size (in number of employees) that is, in this view, regarded as optimal with regard to the production process, is not expected to exceed family-farm size. In this mode of farming, organizational diseconomies were argued to be largely excluded. Wage labor is not used and shirking or free riding is supposedly difficult because of the small size, the hierarchical structure, and the externally enforced continuation of relations within the household 'labor force' (Deininger 1995). Based on these considerations and observations, the common perception of socialist-style farm structures in the early transformation years was that "the evident weakness of this organizational form provides the argument for full scale privatization" (IMF et al. 1991, 157-158) and that "privatization in . . . agriculture mainly concerns the breaking up of large units" (World Bank 1995, 2).
The economic goal of agricultural reforms was to raise productivity, for which dc-collectivization was considered a condition. Crucially, and understandably in the above view, de-collectivization was commonly defined as the formation of individually operated (for short, individual) farms from the land and property of formerly collective and state farms (henceforth referred to as traditional farms), This process was expected to follow privatization, that is, reforms in property rights over farmland and other farm assets. …