Security of Property Rights and Land Use Transition in Ukraine

Risk and uncertainty over the results of agricultural production were always considered as impediments for the development of agricultural sector and rural areas. Besides traditional weather and market related sources of uncertainty, agriculture in transition economies is facing one more major factor of risk – changes in the institutional protection of property rights. This paper illustrates how such institutional uncertainty affects the land use and crop mix patterns in Ukraine. Ukraine is a country with some of the richest arable land in the world and is among the largest agricultural producers. Land reform started in Ukraine in 1990. It transfers land from state to private ownership. However, a market for land sales has not been established yet. Moreover, its establishment has been postponed several times since 2001. Thus, the design of this institution remains unknown, which brings uncertainty about the rights of owners, state, tenants and investors. To test if unsecured property rights for land lead to under-investments and impact the crop mix, this paper uses different sensitivity to institutional uncertainty of investments in annual vs. perennial crops. Data from Ukrainian State Statistic Committee for years 2004-2010 is used. This unique set contains panel data on a very large sample of farming entities. It shows that almost 95% of Ukrainian agricultural land is rented. Such structure creates incentives for investments in relatively more secure annual crops. The results of seemingly unrelated regression analysis show that a higher share of rented land is associated with a lower share of land used for perennial crops. At the same time, farms rent more land to increase share of annual crops. The difference in response to uncertainty is found significant between the two crop types. It implies that extension of moratorium on land sales in Ukraine leads to under-investments in Ukrainian agriculture in general and into more capital intensive crops in particular. The uncertain property right makes the tenant deviate from the “optimal” crop mix reducing the productivity of tenant farms. Thus, Ukraine faces significant losses in agricultural production and GDP in the short run. Moreover, the uncertainty leads to underinvestment into new technologies including adaptation to the climate change. Such underinvestment affects productivity and vulnerability of Ukrainian agriculture in the longer run