Efficiency of Socialist Cooperative Farming: Appearance and Reality

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NOT

FOR

QUOTATION WITHOUT PERMISSION OF THE AUTHOR

EFFICIENCY OF SOCIALIST COOPERATIVE FARMING:

APPEXRANCE AND REALITY

Csaba Csaki Kirit S. Parikh Laszlo Zeold

October, 1984 ITP-84-85

Working Papers a r e interim reports on work of the International Institute for Applied Systems Analysis and have received only limited review. Views or opinions expressed h e r e i n do not necessarily represent those of t h e Institute or of i t s National Member Organizations.

INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg, Austria

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FOREWORD

Understanding the n a t u r e of the world food system has been a major objective of IIASA's Food and Agriculture Program (FAP), since it began in 1977.

Scholars from different nations have worked together in t h e FAP.

The interactions of scholars from many different nations and perspec- tives sometimes reveal preconceptions regarding systems one is not fully familiar with. And often t h i s provides interesting questions for fresh analysis.

This paper on efficiency of socialist cooperative agriculture is one such example of such analysis. The questions posed here were raised in discussions when a group of FAP scholars from different nations visited a cooperative farm in Hungary. In this paper the authors have advanced some hypotheses t o explore t h e reality behind the apparent comparative inefficiency of socialist cooperative farming.

Kirit S. Parikh Program Leader Food and Agriculture Program.

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The a u t h o r s wish t o t h a n k Odd Gulbrandsen a n d Janos Hrabovszky for discussions a n d c o m m e n t s on a n earlier draft.

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Institutional Set Up of of Hungarian Cooperatives T h e Models

The Results References

-

vii

-

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EFFlCIENCY OF SOCIALIST COOPERATTVE FARMING:

APPEARANCE AND REALI?TY

Ckaba Csaki. Airit Parikh a n d Laszlo Zeold

Cooperative farms provide m e m b e r s of t h e cooperative with private (fam- ily) plots in a n u m b e r of socialist countries in Eastern Europe. I t is also gen- erally believed t h a t t h e value added from the private plots on a per h e c t a r e basis f a r exceeds t h e value added per h e c t a r e from t h e cooperatively cultivated land. For example, i n Hungary a typical cooperative h a s a b o u t 700 m e m b e r s a n d o p e r a t e s a r o u n d 5000-6000 h e c t a r e s of land, of which 500-600 h e c t a r e s are o p e r a t e d a s household plots by t h e members, but about 25% of t h e total value of products comes from private operations. Even in t h e Soviet Union where s u c h small holding agriculture i s now being encouraged, similar differences in out- p u t per h e c t a r e between private a n d cooperative l a n d a r e reported.

From this, t h e western economists have a tendency t o conclude t h a t private farming is m u c h m o r e efficient a n d t h a t if only all farming were m a d e private, socialist a g r i c u l t u r e would produce m u c h more. But t o what e x t e n t i s s u c h a conclusion valid? Such a conclusion implies t h a t t h e household's operations of t h e private plots a n d operation of t h e cooperatives a r e independent.

However, in reality t h e two sectors operate in a complementary fashion. More- over, when government control upon cooperatives is i m p l e m e n t e d by economic m e a n s t h e cooperative's m a n a g e m e n t would t r y t o a n d be able t o maximize t h e welfare (income) of t h e m e m b e r s of t h e cooperative. which depends on t h e total i n c o m e obtained from both t h e cooperatively operated l a n d a n d t h e private operations. Thus allocation of products t o exploit comparative advantages a n d t r a n s f e r pricing t o avoid taxes (just a s in t h e case of a multi-national company with production plants in two countries) m a y be expected. Such a behavior could explain a large p a r t of t h e obserued diflerences in productivity.

Large scope exists for both profitable product specialization a s well a s for giving hidden subsidies through accounting practices s u c h a s t h e way in which overhead a n d charges for marketing, veterinary services, etc., a r e allocated.

Private households c o n c e n t r a t e on animal husbandry operations. This provides an opportunity for t h e cooperative t o save on i n v e s t m e n t s in buildings needed for livestock operations, particularly where many f a r m e r s have homes with some provision for keeping livestock. And of course, t h e livestock s e c t o r is particularly suited t o provide hidden subsidies through provision of feed, veteri- n a r y services a n d marketing facilities. Moreover, t h e economies of scale are s t r o n g e r i n crop production t h a n in livestock operations (once t h e buildings are taken c a r e of) and this also suggests t h a t t h e cooperatives c o n c e n t r a t e on c r o p production. On the whole t h e household plots of t h e cooperative m e m b e r s c a n be regarded a s an integral p a r t of t h e large scale e n t e r p r i s e a n d t h e i n t e r - relations between t h e collective a n d household farms in t h e a r e a of production

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a n d sale a r e an extension of large-scale f a r m s , e.g, production inputs, and animals for feeding a r e supplied t o t h e small scale f a r m s on a cost basis. Pro- ducts a r e m a r k e t e d by t h e cooperatives on a c o n t r a c t basis and extension ser- vice is supplied by t h e large scale farms.

I t is o u r contention t h a t for those c e n t r a l l y planned c o u n t r i e s where t h e indirect type of government economic m a n a g e m e n t is applied, and cooperative m a n a g e m e n t is democratically elected ( s e c r e t ballot) as well as where appropriate policies exist t o motivate private households t o seek additional incomes, such a n explanation is closer t o reality.

We propose t o explore t h i s issue through a s e t of programming models of a cooperative farm with household plots a n d agricultural activities. We will stipu- l a t e alternative objective functions and t h e n examine t h e optimal solution to assess incomes per h e c t a r e accruing t o t h e m e m b e r s of t h e cooperative from private holdings and from cooperative farming. We will also explore t h e range of incentives needed t o e n s u r e vigorous operation of private plots. For this pur- pose we take a typical cooperative f a r m in Hungary.

INSITWTIONAL SET UP OF HUNGARIAN COOPERATIVES

Before we describe t h e model i t would be useful to look a t t h e institutional set-up of Hungarian cooperative farms. (In 1983 about 1300 cooperative f a r m s were operating in t h e country). The cooperatives in Hungary a r e business enterprises a n d social institutions a t t h e s a m e t i m e . Their independence is quite large in both areas. As e n t e r p r i s e s t h e cooperatives have full decision making authority i n t h e i r activities. Government control is implemented by indirect tools, operating mainly through incentives.

In general, for t h e Hungarian cooperatives quantitative t a r g e t s of o u t p u t a r e not prescribed by t h e c e n t r a l planners. Their performance is s o u g h t t o be directed through indirect m e a n s of prices and taxes, a n d o t h e r policy instru- ments, s u c h a9 i n t e r e s t and c r e d i t policy, subsidies, etc. The cooperatives cover t h e i r expenses from t h e i r r e t u r n s and a c c u m u l a t e diverse funds. For- mally t h e compensation fund for labour provided by members, which is t h e source of personal income was established a s a residual after deducting costs of materials, taxes, a n d o t h e r obligations from r e t u r n s . The residual was distributed according t o t h e total of t h e so called "work units". A t p r e s e n t t h e cooperatives pay g u a r a n t e e d monthly wages which a r e s e t a t a b o u t 00% of expected income. A t t h e e n d OF t h e year, a n additional bonus amounting t o 6- 20% of t h e g u a r a n t e e d s u m of t h e i r wages is distributed among t h e workers.

This s h a r e depends upon t h e financial performance of t h e enterprise.

The m a n a g e m e n t of t h e cooperatives is based on t h e principles of so called

"self management". The assembly of t h e m e m b e r s is t h e highest decision making authority. Both t h e Board of Directors a n d t h e President-the chief execu- tive of t h e farm--are s e c r e t l y e l e c t e d from among m e m b e r s for a fixed t e r m by t h e members.

Prices of o u t p u t s and i n p u t s a r e s e t by t h e c e n t r a l price controlling authorities or for s o m e commodities are d e t e r m i n e d by supply-demand rela- tions. A cooperative is subject to t h e following taxes:

(a)

Iand

_tax

(b) Income tax on "clear" income: clear income is h e r e defined a s follows:

-

Net Value Added

=

Gross Revenue

-

C u r r e n t Inputs

-

Depreciation

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-

Clear Income (before tax)

=

Net Value Added - Wages

In order to promote i n v e s t m e n t t h e tax r a t e on clear income i s a decreas- ing function of t h e investment/clear income ratio.

Tax on the increase in members' income from the cooperative: t o prevent avoidance of income t a x through increasing wages and bonus and also t o keep personal income i n c r e a s e s under control, not only t h e income tax r a t e increases when average income from t h e cooperative i n c r e a s e s compared t o t h e previous year, but also a n extra t a x has t o be paid when income increases exceed a c e r t a i n specified level

(d) Labour remuneration tax Paid according t o wages as a contribution t o social s e c u r i t y expenditures

(e) Production tax: Levied on t h e value of the industrial and o t h e r non- agricultural activities performed by the farm.

In addition, t h e cooperatives pay contributions towards local municipal develop- m e n t . The clear income of t h e cooperative farm is allocated as p e r t h e decisions of t h e members. Various funds such a s investment, social a n d cultural, reserve funds a n d funds for homes a r e formed and a r e influenced by t h e taxa- tion system mentioned above. Private household income is also subject t o income t a x when income exceeds a certain level. However, i n p r a c t i c e s u c h tax is rarely paid, as t h e t a x free allowance is relatively high. Such potential income from transfers of i n t e r m e d i a t e inputs provides scope for creative tax m a n a g e m e n t by t h e cooperative through product specialization a n d cost alloca- tions.

THE MOD=

The s e t of models we have used was developed on t h e basis of a n LP model used for 5-year planning purposes a t an existing Hungarian cooperative farm.

The 5-year planning model with a detailed description of t h e f a r m a n d t h e r e s u l t s of t h e various model r u n s were published as an operation r e s e a r c h case study in Hungary, Csaki a n d Meszaros (1981).

The cooperative farm u n d e r s t u d y is located in t h e North-Eastern region of Hungary. The f a r m operates on a n a r e a of 5881 h e c t a r e s (3500 h e c t a r e s of arable land. 40 h e c t a r e s of orchard, 1020 h e c t a r e s grassland a n d 521 h e c t a r e s of forest), and h a s a membership of 677 persons The n a t u r a l conditions a t t h e f a r m a r e worse than t h e Hungarian average. Out of t h e 3500 h e c t a r e s arable land, 464 h e c t a r e s a r e used a s t h e members so-called household plots.

Based on t h e actual Hungarian model, t h r e e models have been c o n s t r u c t e d for our investigation:

1. Model for t h e optimization of t h e large scale p a r t of t h e cooperative farm: Large Scale Model (LSM):

For t h i s model we have used two alternative versions of t h e objective func- tion:

BM/l: maximization of clear income after tax (gross revenue

-

c u r r e n t inputs

-

depreciation

-

taxes paid*)

B M / 2 maximization of n e t value added after tax, (clear income a f t e r t a x plus wages**)

- -

*Tax payments are calculated on a simplified basis

*COn the Hungarian cooperative farms a certain payment for workers is guaranteed by the government. %is is considered as labour costs in our case. Additional payments (bonus or income share) is also usual at the end of the year kom the net income.

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2. Model for t h e independent optimization of t h e local household and private agricultural activities: Household Model (HM)

7'he o b j e c t i v e f u n c t i o n h e r e describes t h e maximization of gross value added (gross value of production minus production expenditures without labour costs)

3. Model for t h e joint optimization of t h e large scale a n d household agri- c u l t u r a l activities a t t h e farm: Cooperative Model (CM)

The objective function h e r e is maximization of t h e s u m of n e t value added after t a x of t h e large scale a n d gross value added in t h e household sectors of t h e farm

The Lurge Scale Model includes:

-

1 0 6 v a r i a b l e s : 20 variables r e p r e s e n t t h e options in field crop production, 16 variables a r e related t o t h e utilization of grassland, orchards a n d forest.

The animal husbandry is r e p r e s e n t e d by 25 variables. One variable expresses t h e aggregated construction and non-agricultural activities of t h e farm. The r e s t of t h e variables a r e r e l a t e d t o resource utilization ( m a n u a l labour and machinery requirements) t h e planning of new invest- m e n t in machinery a n d in buildings a n d t h e financial results of t h e farming.

-

1Z1 c o n s t r a i n t s : The first group of c o n s t r a i n t s of t h e LSM a r e r e l a t e d t o t h e availability of physical resources and t h e p a t t e r n s of t h e i r utilization.

Another group of equations describes t h e feed balances and t h e i n t e r n a l r e l a t i o n s of animal husbandry. The use of m a n u a l labour a n d t h e rules of c r o p rotation a r e also described.

l b

Household Model optimizes t h e s t r u c t u r e of t h e private producing activities of t h e cooperative m e m b e r s on t h e basis of t h e 464 h e c t a r e s land endowment.

The household farming is t r e a t e d in this model as a fully independent operation. A s available labour force in this area, t h e non-working members a n d those employed i n o t h e r sectors a r e alsp considered (618 persons with two hours p e r day). The HM consists of:

-

1 4 v a r i a b l e s : 10 various production activities (wheat, barley, c o r n , plum, d a i r y c a t t l e , beef cattle, pig with sow. hog, poultry for m e a t a n d eggs) a r e included a n d t h e financial r e s u l t s a r e also expressed by independent variables.

-

2 1 c o n s t r a i n t s which express building capacities and availability of labour and feed balances. The formation of financial results a r e also described h e r e .

7he C o o p e r a t i v e Model includes both

H M

a n d LSM for t h e joint optimization of t h e cooperative farm. In t h i s case t h e l a r g e s t possible support for household farming a n d t h e availability of t h e additional labour force a r e assumed. Goods a n d services supplied for household farms by t h e large scale f a r m a r e calcu- l a t e d on a c o s t basis, a s is the practice in Hungary. The model consists of:

- 1 2 1 v a r i a b l e s

-

1 4 2 c o n s t r a i n t s with t h e s t r u c t u r e described above.

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THE

RESULTS

Results of t h e various r u n s c a n be seen in Table 1.

As can be expected comparing columns 7 and 4 we s e e t h a t t h e cooperative model CM yields a value added of 81.6 million H.Ft which is 26 p e r c e n t higher t h a n t h e value added of 64.8 million H.Ft u n d e r separate optimization. More- over, total gross value of product a t 230.8 million H.Ft u n d e r CM is l a r g e r by 24 percent t h a n t h e 186.4 million H.Ft worth of gross value of product t h a t can be realized when both large scale a n d household farms c a r r y out s e p a r a t e optimization. What is, however, striking is t h a t increase in t h e gross value of product a s well a s in value added for t h e household operations u n d e r t h e CM a r e both nearly 2.5 t i m e s t h e i r values u n d e r t h e HM. This income is mainly due t o t h e enlarged feed availability offered by t h e large scale p a r t of t h e farm. On t h e o t h e r hand, t h e gross production of the large scale p a r t c a n also be increased due to enlarged labour availability.

The total income of t h e m e m b e r s of t h e cooperative would consist of t h r e e components; gross value added in the household operations, wages received from t h e cooperatively managed large scale operations and t h e bonus received from t h e after t a x c l e a r income. Even assuming t h a t all after t a x c l e a r income is distributed a s bonus, u n d e r joint optimization t h e total i n c o m e of t h e m e m b e r s i s 67.7 mHFt (13.3

+

^27.3

+

27.1) compared t o 55.7 mHFt u n d e r separate optimization, an i n c r e a s e of 21.5 percent. Of course, in practice, n o t all after t a x c l e a r income can be distributed a s bonus because when bonus exceeds a c e r t a i n a m o u n t it will be liable t o additional taxes. Thus t h e gain in total income under joint optimization will be larger t h a n the 21.5 p e r c e n t increase calculated above.

It is also interesting t o compare t h e gross value of product p e r h e c t a r e under different runs. As mentioned earlier, out of t h e total arable land a r e a of 3500 h e c t a r e s t h e cooperative manages 3036 hectares a n d the household plots add up t o 464 hectares. The gross value of product per h e c t a r e s u n d e r LSM 2 a n d

HM

a r e 55764 HFt for t h e cooperative and 36853 HFt for t h e household plots. These a r e somewhat comparable figures and in any case do n o t show t h a t households a r e m o r e productive. In fact they show t h e advantages of large scale crop production practiced by the cooperative. However, u n d e r CM, t h e gross value of product per h e c t a r e s is 61732 HFt for t h e cooperative land a n d 90302 HF't for t h e household plots. Thus if one were t o compare only t h e s e figures one would wrongly conclude t h a t household agriculture i s m o r e productive t h a n t h e cooperative large scale agriculture. In comparing t h e results of t h e various runs, changes in t h e s t r u c t u r e of production have also t o be taken into account. The enlarged feed supply available on a cost basis for t h e m e m b e r s shows t h e extension of poultry and beef production a t t h e household sector; while in t h e HM r u n households could have purchased feed g r a i n s from t h e m a r k e t at t h e substantially higher m a r k e t prices. The changes i n t h e crop- ping s t r u c t u r e a r e a consequence of t h e different feed r e q u i r e m e n t s due t o changes in t h e s t r u c t u r e of livestock production. At t h e large scale part of t h e f a r m t h e additional labour force makes i t possible to enlarge animal husbandry (cattle a n d sheep operations).

The most strildng change in t h e s t r u c t u r e of production under joint optimization i s t h e substantial i n c r e a s e in poultry for eggs in t h e households. House- holds in column 6 have 8000 layers compared to 190 in column 3. One m a y wonder why in egg productions, where economies of scale may be strong, production by households is preferred. The explanation lies in t h e f a c t t h a t households do not m a k e special investment i n buildings for poultry ( m a n y may have spare space in t h e i r ~ a r d s ) , a n d t h a t they do not pay t h e s a m e t a x e s as t h e

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Table 1. Production S t r u c t u r e a n d Incomes of a Farming Cooperative with Household Opera- tions Under Alternative Management Regimes

Cooperative Model CM

Large scale Large scale Large scale

with rnax. with m a . Household and household clear income net value added alone together

LSM/ 1 LSM/2 H M (2)

+

(3) Large-Scale Household Together

(1) (2) (3) (4) (5) (6) (7)

1. Gross value of product

in million H.R. 155.4 169.3 17.1 186.4 188.9 41.9 230.8

2. Direct Ehpenditms Without Labour Coats

inmillionH.R. - 08.8 109.9 11.5 120.9 125.1 28.6 153.7

3 Valued Added* in

million H.Ft. 56.8 59.4 5.4 64.8 63.8 13.3 81.6

4. Wages Paid in

million H.Ft 21.8 24.3 24.3 27.3 27.3

5. Clear lncome in

million H.Ft. 34.8 35.1 35.1 38.5 36.5

8. Taxes Paid in

million H.Ft. 5.7 9.1 9.1 9.4 8.4

7. Clear lncome After Tax

in million H.Ft. 29.1 28.0 26.0 27.1 27.1

PRODUCTION STRUCTURE 1. Wheat-Barley(ha) 2. Corn(ha)

3. Sunflower(ha) 4. Hay-Green Feedba) 5. Rapepa)

8. Grasslandpa) 7. Orchard(ha) 8 Davy Cattlebead) 9. Beef Cattle(head) 10. Sheepbead) 11. Pig-Sow(head) 12. Pig-Hog(head)

13 Poultry for Eggsbiece) 14. Poultry for MeatCpiece)

'Net for cooperative and gross for household

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cooperatives. By giving feed and day old chicks t o t h e households t h e cooperative can expand production without additional investments, and can increase personal incomes without paying wage related taxes. These advantages com- pensate t h e losses of foregoing t h e benefits of economies of scale. This shows t h e advantages of i n t e g r a t e d planning of t h e cooperative and household operations.

If t h e m a n a g e r s have authority upon t h e s t r u c t u r e of production a n d are democratically elected t h e y a r e likely t o work t o maximize t h e total income of t h e m e m b e r s of t h e cooperatives. When compulsory t a r g e t s a r e given For production a n d managers a r e appointed by c e n t r a l authorities, their obligation would be t o t h e planners. They would therefore be m o r e likely to maximize t h e i r performance a s it would be evaluated by the c e n t r a l planners, namely by maximizing clear income of t h e cooperative after tax. Column 1, gives t h e r e s u l t s of

LSM/l

under s u c h behavior. This gives t h e lowest gross valu.e of pro- d u c t as also value added but indeed highest c l e a r income after tax.

To conclude, we believe t h a t these r u n s d e m o n s t r a t e o n e main contention:

When m e m b e r s a r e given small household plots a n d when manage- m e n t h a s freedom i n making farming decisions and is elected democratically socialist cooperative farms plan t h e operations on t h e cooperative land a n d household plots in a c o m p l e m e n t a r y fashion, and in t h e i r effort t o maximize the welfare of t h e i r m e m b e r s an illusion m a y be c r e a t e d t h a t household plots a r e more productive.

Csaki, C., a n d S. Meszaros (Editors). Operation Research Methods for Farm Deci- sion Making (in Hungarian), Mezogozdasdgi Kiad6 Budapest. 1981.