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Food Shortages?
Blame Governments

Jim Prevor’s Perishable Pundit, May 15, 2008

Whenever you read about shortages of food or energy, you will find many “experts” rushing to the table to point out that capitalism has failed and that we need a big dose of government to solve the problem.

It is the nature of markets, though, that shortages are almost always caused by government policies, and so pleas for more government control are typically pleas to give more power and control to the forces that brought about the problem.

The Wall Street Journal ran an interesting piece entitled, In Ukraine, Mavericks Gamble On Scarce Land that focuses on the Ukraine, the breadbasket of the old Soviet Union that once produced 40% of the U.S.S.R.’s agricultural output — and the U.S.S.R. had relatively unproductive farms as its policy of operating state-owned farms blunted incentives and limited the application of capital and technology.

So when the U.S.S.R. collapsed, the Ukrainian government instituted a land reform policy:

After the breakup of the Soviet Union in 1991, governments chopped up the old state farms and distributed plots to their citizens. Lacking capital to invest in the land, the new owners mostly planted small vegetable plots or let their animals graze. Many title deeds were not claimed because their owners were deceased or had emigrated. In all, some 55 million acres of arable land in Russia, Kazakhstan and Ukraine went uncultivated. The region, although still a major grain producer, has continued to suffer from a lack of capital investment ever since.

Foreign investors could provide the capital, but the political system is not reassuring to investors:

Despite the election of a pro-Western government in Ukraine in 2004, an influential business and political elite that takes its cues from Moscow remains skeptical of Western investment. In turn, foreign investors find themselves coping with a venal political system and courts that are deeply corrupt. According to a “corruption perception index” compiled by Berlin-based watchdog Transparency International, international business people consider Ukraine among the most corrupt countries in the world, below Uganda, Moldova and Cuba.

The big issue, though, is laws both too permissive and too restrictive. On the one hand, land reform divided productive agricultural acreage into tiny pieces — the article mentions one woman receiving just 2.5 acres in the privatization scheme — which renders the land practically useless for the mechanized growing of grain. Then a law was enacted prohibiting the sale of land. This law has blocked and still blocks the natural consolidation into viable farming land that the free market would normally bring about. It is in this sense that the law is too restrictive.

On the other hand, blocked by law from acquiring land, entrepreneurs have tried to build reasonably scaled farms by leasing land. Yet the laws are too loose, these lessors seem to be able to cancel a lease at their whim — which makes it difficult for anyone to justify capital investment:

Critics of the land-leasing model say that when a local farmer breaks a contract, there is little legal recourse. Sphere Asset Management, a Kiev-based hedge fund, recently started selling off the leases it holds to 74,000 acres here. "We’re regularly in litigation" with land owners, says Yevgeniy Khata, Sphere’s managing director.

In fact, the loose laws seem to encourage a culture of extortion, in which continuing payments over and above lease obligations are required to stay in business:

Landkom routinely lobbies local officials in an effort to get all landowners in a village to sign leases. The company recently gave its lessors in the town of Zolochiv $22,000 to refurbish an orphanage. It then aired a TV commercial advertising its good will. “I didn’t know where the money came from until I saw a Landkom commercial with our orphanage on TV,” says Natalya Medvid, one of the six Catholic nuns looking after the kids.

Doing business “would be harder for [Mr. Spinks] if he didn’t do these things for us,” says Ivan Stefanishin, deputy governor of Lvivksa, the oblast — or province — that includes Bilyi Kamin and Zolochiv. “An investor has to be part of his environment, that’s normal.”

Right now in the Ukraine, some of the richest soil in the world leases for $14 an acre. The low cost is justified by the low productivity of the land when starved of capital and technology and the legal uncertainty of the leasing process.

In Kiev, the Ukrainian capital, consideration is being given to a law allowing for private land sales. If it passes, many predict a land rush and a big boost in prices. That would mean substantial capital gains for the mostly poor and hard-working people who received land during the privatization.

It would also mean landholdings would consolidate and farms, certain of land ownership, could invest more confidently. Land that now sits fallow would be brought back into cultivation.

More land would be worked with the application of better technology and more use of capital. The Wall Street Journal estimates that merely the untilled arable land of the former U.S.S.R. could grow 115 million metric tons of wheat per year.

This is just one story in just one faraway part of the world. It is, though, a perfect illustration of how political decisions — in this case to ban land sales — can have unintended consequence.

It also points to the political cause of most shortages and the danger of recognizing the flaws of capitalism but assuming the perfection of government.

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