Report No. 12581-MD Moldova AgricultureSector Review February21, 1995 Natural Resources Management Division Country Department IV Europe and Central Asia Region FOR OFFICIAL USE ONLY U Document of the World Bank This document has asrestricted distribution and maybe used by recipients only in the performance of their official duties. Its contents maynot otherwise be disclosed withoutWorld Bank authorization Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Report No. 12581-MD
MoldovaAgriculture Sector ReviewFebruary 21, 1995
Natural Resources Management DivisionCountry Department IVEurope and Central Asia Region
FOR OFFICIAL USE ONLY
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Document of the World Bank
This document has as restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization
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CURRENCY EQUIVALENTS
Currency unit = Russian Ruble, abbr. Rbl.US$1 = 950 Rbl. (as of June 1993)
Currency unit = LeuUS$1 = 4.26 Leu (as of December 1994)
WEIGHTS AND MEASURES
ha HectareKwh Kilowatt hourq Quintalst Tons (metric)
ABBREVIATIONS
Al - Artificial InseminationCIS Confederation of Independent StatesCPI Consumer Price IndexDFI Development Finance InstitutionsEBRD European Bank for Reconstruction and DevelopmentEU European UnionFSU Former Soviet UnionIAS International Accounting Standards
FOR OFFICIAL USE ONLY
CONTENTS
PREFACE.
EXECUTIVE SUMMARY.iii
PART I: MAIN REPORT
1. INTRODUCTION: BACKGROUND TO THE SECTOR . .A. GENERAL BACKGROUND .1B. NATURAL RESOURCE BASE. 3C. CROP SECTOR. 6D. LIVESTOCK ......................................... 9E. HORTICULTURE AND VITICULTURE ...................... 11
2. THE CURRENT STATUS OF REFORM .13
3. A FRAMEWORK FOR SOLUTIONS .. 19A. GENERAL FRAMEWORK .............................. 19B. SOLUTIONS IN SPECIFIC AREAS ......................... 21C. ACTION PLAN AND PRIORITIES ......................... 30
PART II: TECHNICAL ANNEXES
TECHNICAL ANNEX 1: LAND REFORM AND RESTRUCTURING OF FARMS .. 35A. Historic Background .................................... 35B. Land Reform Legislation .................................. 35C. Shareholder Structures . ................................. 38D. Private Farming ...................................... 39
TECHNICAL ANNEX 2: ANNUAL CROP PRODUCTION . . 41A. Highlights Of The Crop Sector ............................. 41B. Current Status . ....................................... 43C. Major Constraints . ..................................... 47D. Recommendations . ..................................... 48
TECHNICAL ANNEX 3: LIVESTOCK SECTOR ....................... 51A. Current Sector Status .......... ......................... 51B. Recommendations . ..................................... 54
This document has a restricted distribution and may be used by recipients only in the perforwmace of thieir lofficial duties. Its contents may not otherwise be disclosed without World Bank authorization. l
TECHNICAL ANNEX 4: VINI-VITICULTURE ........ .. .............. 57A. Grape Production . ..................................... 57B. Wine Production . ..................................... 58C. Wine Marketing ...................................... 59D. Domestic Manufacturing Of Equipment ........................ 59E. Strategy For The Future ................................. 60
TECHNICAL ANNEX 5: THE PROCESSING INDUSTRY:FRUITS AND VEGETABLES .............. ................. 61A. Production And Processing ............................... 61B. Conclusions .......................................... 64
PART III: STATISTICAL ANNEX ................................ 67( A List of Statistical Tables is provided in the Annex)
FIGURES:1.1 Gross Value of Agricultural Output ......................... 11.2 Arable Land ....................................... 51.3 Soil Erosion ..................... 51.4 Land Use ..................... 61.5 Average Yields of Main Field Crops. 81.6 Irrigation and Drainage .9A2.1 Total Grain Areas .............................. 44A2.2 Share of Grain Production by Crop ........................ 45A2.3 Sunflower Production .............................. 46A2.4 Tobacco Production .............................. 47A3.1 Changes in Output of Agriculture ....... .................. 51
TABLES:1.1 Changes in Consumption of Basic Food Products ................. 21.2 Agroclimatic Zones .41.3 Main Annual Crops. 73.1 Recommended Actions ................................ 31Al. 1 Moldovan Legislation on Land Reform and Farm Restructuring ... .... 36A3.1 Production of Major Livestock Products ..................... 53
MAP: IBRD #24285
PREFACE
i. This report is based on the findings of World Bank missions' that visited Moldova inFebruary, March, and May of 1993. A draft version was discussed with the Government in April 1994.After discussions, the draft report was revised to incorporate comments and to reflect changes in policyintroduced up to mid 1994. The report was finalized in November 1994. The work was supported bythe EBRD. Field work was coordinated by the Ministry of Agriculture and Food. Statistical support wasprovided by the Institute for Agrarian Economy under the Ministry of Agriculture and Food, and by theDepartment of Statistics.
ii. The report consists of an executive summary, main report, technical annexes, and astatistical annex. The report includes an assessment of the strengths and problems of the agriculturalsector, a summary strategy for building on strengths and addressing problems, and recommendations forimplementing the strategy.
iii. Preparation of the report has been aided throughout by the substantive and logisticalassistance of the Moldovan Ministry of Agriculture and Food, and by other Ministries and Departmentswithin the Government, by numerous managers of enterprises, representatives of local government, andfarm employees. For this assistance the World Bank is very grateful.
i The missions were led by K. Brooks, and included B. Gardner (Economist), J. Yaron (Finance), Z.Lerman (Economist, Land and Farm Restructuring), 0. Honisch (Agronomist), T. Schillhorn van Veen(Livestock), 0. Bernabe (Viticulture), N. Grimas (Oenology), L. Garoyan (Horticultural Processing), and R.Judson (Statistics).
EXECUTIVE SUMMARY
Objectives
I. The objectives of the Agricultural Sector Review are twofold:
a. to assist the Government in preparing a strategy for recovery of Moldovan agricultureas an internationally competitive sector with well-functioning markets; and
b. to provide a foundation for formulating Bank lending operations in support of Moldova'sagricultural reform.
II. Elements of the strategy have already been incorporated in the early stages of theGovernment's reform program, and have been supported by the World Bank's Emergency AssistanceCredit and Rehabilitation Loan.
Assessment
III. Since Independence in August 1991, Moldovan agriculture and food industries have faceda series of shocks, including: a large unfavorable adjustment in terms of trade; civil unrest; severedroughts in 1992 and in 1994; and the economic disruption associated with the break-up of the USSR.Agricultural output is estimated to have declined 33 % between 1989 and 1993. Output fell an additional26% in 1994, due in part to severe drought and other natural disasters. Moldovan GDP fell by over 50%between 1990 and 1993, and the additional decline in 1994 is estimated at 30%. Agriculture and foodprocessing make up more than half of the Moldovan economy. The extreme decline in the Moldovanaggregate economy accentuates the urgency of measures to initiate agricultural recovery.
IV. Moldova has followed a tight monetary policy since late 1993, supported by an IMFstand-by arrangement. The program brought inflation down to a 2.5% monthly rate in mid 1994, butsevere problems of inter-enterprise arrears and illiquidity continue to constrain agricultural production,processing, and marketing. Land reform and restructuring of farms are proceeding. By early 1994,approximately 15% of Moldovan agricultural land was privately managed (13% in expanded householdplots and 2 % in private farms). The remainder of agricultural land was managed by collective and statefarms, new producer cooperatives, joint stock companies, and other forms of shareholding farms. In July1994, approximately 10,000 private farns were registered, occupying less than 1% of agricultural land,with an average size of one to two hectares. Approximately 30,000 additional private farms werereported to be functioning, but not yet registered. The estimated 2 % of agricultural land in private farmsincludes both registered farms and those for which registration is pending.
V. Privatization of processing and marketing is proceeding slowly. Restructuring andprivatization of the parastatal monopolies in agricultural chemicals, machinery, and grain are underpreparation, and privatization will be undertaken in the 1995/96 reform program of the MoldovanGovernment. Trade policy is largely liberalized. However, export quotas amounting to an effective banon exports remain in effect for grain and hides. Producer and consumer prices are unregulated andcontrols on marketing margins are scheduled to be removed in two stages in early 1995. The state nolonger requires mandatory deliveries under procurement quotas. The state remains a significant purchaserof agricultural products, primarily in order to meet export commitments under bilateral tradingagreements.
iv Executive
A Strategy for Sectoral Recovery
VI. If normal weather patterns prevail in 1995, agricultural production can be expected toexceed the very low levels of 1994, and the domestic market will be able to absorb the increase. Long-tern growth and sustained recovery, however, will depend on export markets. The small Moldovandomestic market cannot absorb growth from an agricultural sector employing approximately one third ofthe labor force. Sectoral recovery will depend on the success and the speed with which Moldovaredevelops traditional markets in the formner Soviet Union, and opens new markets.
VII. Growth led by agricultural exports will not be easily achieved, since financial and physicalimpediments to trade within the former Soviet Union remain high, and Moldovan products are still quitenew in European, Middle Eastern, and North African markets. Because export expansion is bothnecessary and difficult, Moldovan policy and institutional reformns in agriculture should accord highpriority to this objective.
VIII. The international experience with agricultural development for export markets suggests severallessons of relevance to Moldova. Agriculture should not be discriminated against in price and tax policy,and neither should it be subsidized. Discrimninatory price and tax policies reduce incentives forproducers. Subsidies, on the other hand, encourage producers to retain high costs of production and toproduce products that can be exported only with additional subsidies. Moldova should therefore avoidcostly programs of price support or market intervention, and instead allow domestic prices to reflectchanges in border prices. Financial policy should be consistent with price policy; that is, debts shouldbe paid without arrears and the bankruptcy law should be enforced. Experience with agrarian reformelsewhere in the world suggests that small and medium family-based farms are best able to contain costsand respond flexibly to changes in prices and market opportunities. Large farms, on the other hand, tendto be more capital intensive, less responsive to changes in market conditions, and more dependent onsubsidies. The Moldovan strategy for land reform and farm restructuring should therefore provideworkable mechanisms for family-based private farms to emerge from the collective and state farms,and to operate independently or in association with each other. Remaining large farms, like otherbusiness entities, should be subject to strict financial discipline and should undertake restructuringin response to the change in ownership of their assets. Since most Moldovan products are exportedin processed form, the strategy for recovery depends critically on improvements in agroprocessing tocreate the quality of products and packaging demanded by consumers. Privatization of food processing,improved management, and increased investment in agro-industry will be needed for sustained recoveryof primary production. Privatization of food processing should accelerate. Tariffs on agriculturalproducts should be low and uniform so that the food processing industry can be competitive inexport markets. The competitiveness of Moldovan products will depend on price as well as quality, andthe price in foreign markets reflects the exchange rate. The exchange rate should not be allowed tobecome significantly overvalued relative to the currencies of major trading partners.
Specific Recommendations
IX. Moldova has introduced important improvements in the regulatory environment foragriculture since 1991, including pricing, marketing, and trade policies. There has been less success inchanges in ownership and behavior of enterprises. A number of institutions needed for successfulfunctioning of markets for factors of production and output are not yet in place or are operating poorly,
Summary v
such as land markets and financial markets. A number of specific measures which should be pursuedare listed in the following paragraphs.
Price, Trade, and Tax Policy
X. Export Licenses and Ouotas. The prohibition (through licensing and quotas) on exportof grain, skins, and hides is a costly distortion. While the prohibition is in effect, the Moldovan livestockindustry is forced to sell skins and hides domestically. Markets should be allowed to determine whetherthe value of skins and hides is greater internally or on foreign markets, and agriculture should not berequired to subsidize light industry by providing raw materials at less than world market prices. Nowthat the leu is a strong and convertible currency, it is unlikely that Moldovan grain producers would findit advantageous to seek out foreign markets, given the recent shortfall in domestic production relative toutilization. Grain producers should, nonetheless, have the opportunity to export if it is in their economicinterest. The option of selling outside the country or to traders who will place shipments abroad givesproducers the market power needed to enforce timely payments for domestic deliveries, or to counterpotentially monopsonistic practices on the part of domestic buyers.
XI. Tariffs. A fully competitive processing industry will need to source agricultural rawmaterials at the lowest cost and with full quality selection. The current tariff structure offers domesticproducers protection against imports of raw agricultural products and processed goods from outside theCommonwealth of Independent States (CIS) or Romania. Since most trade at present is with the CIS andRomania, the overall level of protection is still relatively low despite this tariff structure. Protectionagainst imported raw commodities from outside the CIS and Romania can nonetheless substantiallydepress the competitiveness of a modern sophisticated processing industry. The industry would be at acompetitive disadvantage in switching among sources to satisfy quality considerations, and also in theevent of regional drought encompassing Moldova, Ukraine, and Romania. Just as competitive primaryproducers need full access to export markets without regulatory barriers, competitive processors needaccess to imports of raw materials without high tariffs. Moldova's agricultural growth will come fromboth primary production and processing, and a liberal trading regime will promote growth. Remainingexport barriers should be removed and import tariffs reduced.
XII. Tax Policy. A number of changes in the administration of the value added tax should beconsidered to increase the profitability of exporting. After consultation with other members of the CIS,it would be desirable to make exports to CIS countries zero-rated for VAT, and to apply VAT to imports.A VAT refund system should be considered for exports to non-CIS countries, since the current systemof crediting exporters for VAT taxes involves lengthy delays.
Privatization and Enterprise Restructuring
XIII. Privatization of Food Processing and Marketing. Progress under the first round ofprivatization of food processing (1993/94) was slower than expected, initially due to lack of consensuson special procedures for privatization of processing plants, and later because implementation of the entireprogram was delayed until well into 1994. The special procedures include distribution of a portion ofshares to past suppliers of raw materials, with additional portions to employees and the general publicagainst vouchers. There was no provision for foreign participation in the initial round of privatizationunder these procedures. Experience in Central Europe has shown that potential foreign investors oftenseek majority ownership prior to investing. The initial Moldovan approach to privatization of foodprocessing may thus have discouraged direct foreign investment. The slow pace of privatization has also
vi Executive
left enterprises in uncertain status longer than desirable, with a likely negative impact on managerialdecisions and stewardship of assets. Privatization of enterprises on the list for 1993/94 should becompleted, and shares of these companies should trade on secondary markets. Procedures forprivatization under the 1995/96 round should be allowed to include provision for direct foreignparticipation. This round should be implemented without waiting for completion of the prior round.
XIV. A number of agricultural enterprises exempted from the first round of privatization shouldbe included in the 1995/96 program. Specialized livestock complexes were not included in either thefarm restructuring program or the privatization program. A number of complexes have been closedbecause they ceased to be financially viable. Those that remain should be privatized. The parastatalfirms supplying agricultural chemicals (Fertilitatea), machinery (Arca Moldova), and concentrate feed(Cereale) should be prepared for privatization under the current program, and be privatized in units thatpromote competition. The financial weakness of these firms has left farms without key services, suchas timely delivery of inputs at competitive prices, and suppliers' credits for input supply.
XV. Moldcoop, the consumer cooperative, presents a special set of problems. Theorganization cannot be privatized, since it is formally owned by shareholders, and hence already private.It is overextended, however, and financially weak, and its internal rules of operation are not consistentwith Western style cooperatives. Moldcoop should be assisted in designing a program of financialrestructuring acceptable to its creditors and in bringing its operating rules into conformity with those ofWestern style cooperatives. It should also be subject to all anti-monopoly laws.
XVI. Land Reform and Restructuring of Farms. The program of land reform, suspended inlate 1994, should be resumed. The distribution of entitlement certificates to land shares under the secondstage of land reform should continue to completion. Those who wish to exit from large farms with theirland and asset shares should be provided additional options besides individual exit as a private farmer.Some shareholders may wish to exit in small groups with contiguous land shares. Others may wish toswap land or asset shares and exit with a business unit other than an individual farm. No minimum farmsize should be established. Mechanisms through which people can voluntarily pool their shares if theyso desire should be devised, and the public should be informed of these alternative options, in additionto the more common options to remain within the large unit or exit individually. Procedures forregistration of private farmers should be simplified and registration accelerated. Private producers whochoose to work in associations of private farmers or to form Western style service cooperatives shouldhave their right to do so legally protected.
XVII. Land markets are essential for agricultural finance in a market economy, and forcontinued changes in farm structure to retain competitiveness over time. The prohibition on purchaseand sale of land before 2001 should be repealed so that land markets can function. Land should bevalued by markets, and not by administrative decrees. No minimum value of land should be setadministratively, nor should maximum or minimum rental rates be set. Administrative valuation may leadto excessively high values relative to those that the market would establish, and high costs of land willreduce competitiveness of Moldovan agricultural products. Distribution of land titles should continue andland ownership should be registered, in order to provide a strong legal basis for transactions.
Regulation and the Role of the Ministry
XVIII. Product Oualitv Standards. The Government should revise standards for food safety andproduct quality, and provide internationally accepted quality testing and certification. If the Government
Summary vii
provides certification directly, this should be done on a basis of cost recovery. Although certificationaccording to standards of the European Union is at present not mandatory in all markets, it is nonethelessdesirable for competition in segmented markets, as well as for sales to the European Union. Moldovanconsumers and those elsewhere in the CIS may not require that products meet the particular standardsof the EU, but they will nonetheless increasingly seek assurance of acceptable quality and informationabout the contents of processed products.
XIX. Re-organization of the Ministry of Agriculture and Food. The Ministry of Agricultureand Food should be organized to fulfill key functions. The structure of the Ministry should reflect itsfunctions, important among which should be design and implementation of reforms, monitoringperformance of the sector, providing economic information on domestic and foreign markets, andenforcing standards for food safety and the safety of the agricultural work force. The Ministry shouldprovide advisory services for farms to assist in adjusting to the new environment. These services shouldbe offered on a basis of partial cost recovery, and private consulting firms can be expected over time tocomplement the governmental advisory services, and substitute for some.
Investment and Finance
XX. Investment, both public and private, is vital to the strategy of recovery. Substantialprogress on privatization and land reform, development of functioning land markets, continuedstrengthening of the banking system, and continued control of inflation are critical first steps towardincreasing private investment in primary production and processing. Private savings of rural householdsin Moldova are likely to be a source of investment, since rural savings in most low and middle incomecountries have been a substantial source of agricultural investment. These savings provide credit toagricultural borrowers through small rural financial intermediaries, such as credit unions or savingscooperatives. Programs of directed lending or subsidized credit offered through the large banks reducethe opportunity for small rural financial intermediaries to develop. The policy in Moldova not to offersubsidized credit for targeted borrowers should therefore be retained. Public investments should beconcentrated on public functions in the sector, such as provision of market information, maintenance ofcore activities in agricultural research, and education and training.
XXI. The severe decline in output in 1994 has made it difficult to maintain momentum on anagenda of reform, since immediate problems of disaster relief have necessarily absorbed attention. Thedecline in 1994, however, makes recovery even more imperative, and sustainable recovery necessitatescontinued commitment to reform and to exports. Moldovan agriculture has begun to change. Moldovanwines have been well received in small quantities in European markets, offering encouragement thatcontinued efforts to export into this very competitive market can succeed. The significant successes,howe%er, must be viewed against the overall contraction of the sector by approximately one half in thefive years since 1990. The difficulties of 1994 are likely to lead to renewed calls for protection, support,and intervention, on the grounds that the partial reforms implemented over the past four years have notled to recovery. The experience of developed market economies has shown that agricultural support isvery expensive and is not consistent export competitiveness without subsidies. Moldova's greatest successin the overall reform program to date has been the high degree of macroeconomic stabilization achieved,as evidenced by the reduction in inflation and the stable leu. Expensive agricultural programs wouldjeopardize these early gains. It is therefore in the interests of the agricultural sector and the economy asa whole to continue to pursue a program of market reforms oriented toward export expansion, with fullerinstead of partial implementation of the reforms.
viii Executive
MAIN REPORT
CHAPTER 1
INTRODUCTION: BACKGROUND TO THE SECTOR
A. GENERAL BACKGROUND
1.1 Moldova is a small, densely settled country that is primarily agricultural. Agricultureproduces about 40% of Moldova's net material product and employs one third of the labor force. Inaddition, the processing of agricultural products accounts for 40% of industrial output and 20% ofindustrial employment. Moldova's land area is the second smallest (after Armenia) of the fifteen formerrepublics of the Soviet Union (FSU). With a population of 4.4 million, Moldova has 130 people persquare kilometer. This is the highest population density of the former republics and it is about the sameas that found in Denmark. Notwithstanding the dense settlement, 52.5% of the population is rural,according to data from 1990. The average for all FSU republics is only 34% rural population.
1.2 Moldova's small size and agricultural specialization imply an important role foragricultural exports. Agricultural and food products accounted for over half of Moldova's exports in1987-90. Agriculture has traditionally been a large net exporter. In 1990, prior to the reforms,agriculture and the food industry had a net positive trade balance of about 2500 million rubles, when theaggregate national trade balance was negative by 285 million rubles. Yet Moldova has essentially noproduction capacity for inorganic fertilizers, pesticides, mineral or vitamin feed additives, veterinarymedicines, or petroleum fuels. It must rely on imports of these inputs. By necessity, then, the economymust be relatively open. Because of the importance of trade in Moldova's agriculture, the recent rise inprices of imported inputs relativeto output prices has required alarge adjustment in this sector.
1.3 S i n c eindependence in August 1991, Gross Va I ue of Agr I cu I tura I Output
1683 Cwotnstt 68eTarence Prlc4
Moldova has experienced a 1 n c
series of shocks: a large, 2
unfavorable adjustment in itsterms of trade; civil unrest;severe droughts in 1992 and1994; and economic disruptionassociated with the break-up ofthe USSR. The effects upon theagricultural sector have been 40
serious. The gross value of 30
agricultural production (in 2
c o n s t a n t p r i c e s ) fell l_approximately 33 % between1989 and 1993 (Figure 1.1). I 1 11 9
From 1990-1993, MoldovanGDP in aggregate fell by morethan 50%.
Figure 1.1: Moldova: Gross Value of Agricultural Output
2 Chapter ]
1.4 Food supplies toconsumers have been reduced withlower agricultural output, but sufficient Table 1.1: Changes in Consumption of Basic Food Productsfood remains readily available in stores (annual per capita consumption in kilograms)and farm markets. Since 1990, theMoldovan diet has changed in response 1990 1992 1993to falling incomes and rising relative (estimated)
prices, but it remains adequate Meat and meat 58 46 34nutritionally, on average (Table 1.1). products
Most families have strong rural links Milk and milk 303 198 172and rely heavily on their own products
production to reduce food costs. Eggs (pieces) 203 166 110According to data provided officially tothe statistical committee of the Fish and fish 12 2.3 1.3
Commonwealth of Independent States products
(CIS), the share of the family budget Sugar 49 31 30
spent on food in Moldova rose from Vegetable oil 14 9 7.8
37% of all expenditures in 1991 to 46%in 1993. This is about the same Potatoes 69 67 80
proportion of expenditures as in Russia, Vegetables 112 95 91
and less than in other countries of theCIS. Consumption of meat in Moldova Fruits and berries 79 63 80fell in the same period from 55 kg percapita to 35 kg, which is lower than Bread and bread 171 170 173
meat consumption in Ukraine, Russia, productsand Belarus. Meat consumption tends Source: Ekonomika SNG v. 1993, Kratkii Spravochnik,to be highly correlated with income, Moscow, 1994, p. 30
although dietary traditions and local tastes also influence consumption patterns. Meat consumption inMoldova, at 35 kilograms per capita, is within the range observed in middle income countries.
1.5 The economic and natural shocks to Moldova's agriculture since 1990 have been extreme,and the conditions that have prevailed during the transition are not those that can be expected tocharacterize the sectoral environment in the longer run. Regular trading relations with neighbors and newpartners are being established, the domestic economy will be more stable than in 1992 and 1993, anddrought is not likely to recur every second year. The events of the last four years, however, illustratein severe form the new economic realities for Moldovan agriculture, and these realities will shape thetransition. Among the realities are the greater impact of drought when it does occur and increasedcompetition for Moldova's traditional markets.
1.6 Much of Moldova is in a zone of low precipitation and high risk of drought. Althoughthe severity and frequency of the droughts of 1992 and 1994 were unusual, longer term precipitationpatterns show risk of drought. In the Soviet period, particularly during the last three decades of theperiod, the variability of Moldovan output was absorbed into the larger Soviet market, and the impactof variability in Moldova was reduced. When local feed was scarce, additional grain was allocated toMoldova at the low domestic price of Soviet internal trade. When local feed was abundant, feed importswere reduced, although Moldova was a consistent net importer of grain for its large livestock sector. Atpresent and in the future, Moldovan producers and consumers will bear the cost of drought. Variability
Introduction: Background to the Sector 3
of output will make the sector somewhat less competitive than it would be if production were stable,although agricultural exports are likely to remain important. Trade policy, marketing institutions, newinvestment, and irrigation policy can reduce the costs of drought, but public policy in a small openeconomy cannot eliminate the full impact of drought at acceptable cost.
1.7 Free trade is an important instrument for management of drought. Under a free tradepolicy, agricultural raw materials are imported in years of poor domestic production, and raw andprocessed products are freely exported in good years. The variability of domestic prices will be lesswhen trade is free than if trade barriers are in place. New institutions in marketing, such as futurescontracts, assist in management of variability of output. When futures contracting is developed,variability of prices is spread over time as markets absorb information on the size of the domestic cropand movements in world prices. Through futures contracts producers can shift price risks to othereconomic agents more willing to absorb them. Management of price risk will require that Moldovantrading firms participate in regional commodity exchanges, and make use of futures contracting as theseinstitutions develop. Irrigation reduces the variability in output. When the costs of variability are bornedomestically, the importance of using existing irrigation capacity efficiently increases. Pricing for waterand irrigation services is important, and the economic return to maintenance of existing irrigation is highwhere drought is frequent. Investment in irrigation, like all investment, must be subject to rigorous testsfor economic and financial rates of return, and users of irrigation services should expect to pay most orall costs of construction and operation.
1.8 In addition to requiring new approaches to management of drought, the break up of theSoviet Union removed Moldova's privileged access to the highly protected internal Soviet market. In thepast Moldova was one of the southern-most points in a large and protected northern market. Moldovanproducers now face greater competition from other exporters at the same latitude, many of whom havesuperior infrastructure for processing and greater capacity to finance and subsidize exports. Markets inthe FSU remain very important for Moldovan exports, comprising approximately 80% of total Moldovanexports in January - May 1994.
1.9 Increased competition, reduced profitability for traditional products, and greater variabilityof earnings are enduring features of the new economic environment for Moldovan agriculture. Althoughthese features create obvious difficulties, the sector has strengths to adapt to the new realities. Theseinclude the fertile soil, a well educated agricultural labor force, and high recognition of products withinmarkets of the former Soviet Union. In addition, Moldovan exporters have begun to market agriculturalproducts in new markets in Western Europe. Moldovan exports to Germany and Italy, for example,totalled over $5 million in the first quarter of 1994 (about 20% of non-FSU trade in this period), andmuch of this was in agricultural products.
B. NATURAL RESOURCE BASE
1.10 The dominance of agriculture in Moldova's economy derives from its resource base,moderate climate and excellent soils. Chernozems, among the most fertile soils in the world, characterize80% of the land area. Important products include fruits and berries for processing, tobacco, wine grapes,winter wheat, maize, and grain-intensive livestock (hogs and poultry). The product mix reflectsMoldova's labor-intensive resource base as well as its fertile soils.
4 Chapter I
Topography and Climate
1 .11 Natural conditions in Moldova are typified by a substantial variation in topography, soils,climate, flora, and water resources. The countryside is predominantly rolling hills. The mean altitudeof the country is 147 m and the highest point is 430 m. The topographic relief has an important influenceon the microclimate and determines to a significant degree the specialization of agriculture.
1.12 Total land area of Moldova comprises 3.4 million hectares. In 1991, about 2.3 millionhectares was agricultural land, of which 1.5 million hectares was arable land, and about 370 thousandhectares were forested. The republic is not rich in natural surface water sources which occupy only about15,000 ha and store a volume of some 210 million m3 . Manmade lakes and canals cover about 25,000ha and hold some 800 million m3 .
1.13 The abundance of sunshine and warm temperatures are the most positive factors ofMoldova's climate. The warm period extends from about 160 to 190 days. Very variable weather,particularly in the spring, and frequent dry spells during the growing season are the most negativeelements of the weather pattern. The average annual rainfall is around 380-550 mm. It decreases acrossthe country in the general direction from northwest to southeast. Rainfall distribution is skewed, with 75-80% of the precipitation occurring during the summer months. Lengthy breaks in rainfall coupled withhigh air temperatures and hot winds (sukhovei) in the second half of summer can cause a rapid decreasein air humidity, often below 30%. This can result in serious drought conditions in the soil. The averagenumber of days with sukhovei in the period March-October generally increases from north to south, butin the extreme south it decreases again with proximity of the Black Sea. The mean number of days withsukhovei in the northern-most rayon (district) of Britchany is 12.3, in Chisinau it is 28.7, while in thesouthern-most rayon of Vulcanesti it is 16.3.
.14 The republic's territory is subdivided into three agroclimatic zones, based on temperatureand precipitation -- the Northern, Central and Southern Zones. These zones are sometimes also calledthe Northern forest-steppe, the Central forest zone, and the Southern steppe. Additionally, the Northernand Central Zones each have one subzone where topography, temperature, humidity and precipitationdiffer from the surrounding region. The characteristics of the three main agroclimatic zones are givenin the Table 1.2 below.
Table 1.2: Agroclimatic Zones
Agroclimatic Length of Frost- Temperature Sum Mean Precipitation (mm) duringZones free Period during Vegetation
Period (°C) Year Vegetative Period
North 165-180 2750-3000 450-550 285-300
Center 175-190 3000-3200 400-525 265-315
South 175-195 3200-3400 380-500 235-275
Introduction. Background to the Sector 5
SoilsMOLDOVA
1.15 Moldova's main Arable Land on Slopes (%)natural wealth is its fertile soil. Thereare fifteen major soil types on itsterritory, belonging to three largegeneric groups: (a) chernozems (black 1///////soils) of various subtypes, and closelyrelated meadow-chernozems andhumus-carbonate soils, occupying i-//degrees/-
80% of the territory (2.5 mil ha); (b) 6-15 degrees
brown and gray forest soilsrepresented on 11.5% of the surface; - ere
and (c) alluvial meadow soils, 5- degrees
sometimes saline and swampy,occupying 8.5% of the land. Thepredominant chernozems are amongthe most fertile soils in the world. See: daoRoschlIattut
They are usually found below 260 mof altitude. Above this level occurforest soils, representing about 0.5million ha.
1.16 Due to the rolling nature of the countryside, about 80% of the arable land is on slopes.Only 20% of arable land is on flat ground, 61% is on slopes from 1-5°, 15% is on inclines of 5-8°, andover 4% is on gradients from 8-15° and definitely should not be under annual cultivation (Figure 1.2).While wind erosion is not considered a problem, the extent and potential for water erosion is seriousbecause of the hilly terrain andoccasional torrential rains during thesummer months. MOLDOVA
Progression of Soil Erosion1.17 The Institute of SoilScience estimates that in 1992 eroded 00O ha
land comprised about 740,000 ha, oralmost half of all arable land, of Boo .which some 410,000 ha are 7 0
considered eroded to a medium to 700 . - . ....
high degree. Figure 1.3 gives the 5oo .estimated progression of erosion overthe past 20 years. 5 the past 20 years. ~ ~~~ ~~~~~~~~~~~~~500 _.........................................................................................................................
based on weed control with herbicidesin the last decades of the Soviet s l.Ataitet f B!oil St..o.
period. Experimental results have Figure 1.3: Soil Erosion
6 Chapter I
shown that on slopes of 3-5° a rainfall of 64 mr caused a soil run-off of 98-218 m3/ha. When mechanicalinterrow cultivation was replaced with herbicides, researchers observed that the intensity of soil erosionincreased 8-10 times in fields planted with maize and 4-5 times in vineyards. The reason advanced forthis phenomenon is increased topsoil compaction and decreased water infiltration when using herbicidetechnology.
C. THE CROP SECTOR
Land Use
1.19 At the outset of the transition, in 1989 and 1990, about 60% of the gross value ofMoldovan agricultural output originated in the crop sector, and about 40% in the livestock sector. Withthe change in relative prices within the sector (livestock prices are now lower relative to crop prices thanin 1990), and the fall in output of meat and milk, the relative weight of the crop sector has increased.Livestock production remains important, but Moldova is, now even more than in the past, a producer ofhigh value crops for export and grain for domestic markets.
1.20 Of total land area (about 3.4 million ha), approximately 76% is agricultural land. Halfof the total land area (1.7 million ha) is arable, and farmed relatively intensively (Figure 1.4). Perennialhigh value crops consisting of fruit trees, vineyards, nuts, and berries were grown on about 14% (0.4million ha) of all land. About 10% of all land is used for pastures and meadows.
Land Use Cin %)Tot.I . L_d Ar8 = _ 4 A I I ron ha
PasturQ (10 0d)
N ngarrcult ral land (24.D%)
Orchards and Vlneyards (14 D>)
Arable C52, 05
Figure 1.4: Land Use in 1993
Introduction: Background to the Sector 7
1.21 In an average year, the country grows grain crops on almost half of its arable land.Industrial crops (oil seeds, sugar beets, and tobacco) are grown on another 15-17%. About 7% is undercultivation of potatoes and vegetables, and the remaining arable land is occupied by forage crops. Table1.3 gives a detailed breakdown of area under crops in 1992.
1.22 Crop rotations appear to be welldeveloped and based on past research and Table 1.3: Main Annual Crops in 1992scientific recommendations. They are carried outin a relatively rigid fashion. There is clearlyjustification for more flexible rotation in order to ('000 ha) %facilitate soil conservation (erosion control)measures, and to increase area and frequency of All grains 745 48more profitable crops in the rotation. The crop Winter wheat 281 18
rotations practiced in Moldova are generally much Maize 258 17longer than in western agriculture; it is not rare to Winter barley 86 6find rotations six to ten years long. Spring barley 37 2
Oats 3 <1
1.23 Although Moldova had some of Grain legumes 71 5of which:
the highest crop yields of the FSU, yields could Peas 53 4be improved with better management and Beans 18 1economically appropriate use of inputs. Figure Sunflower 131 81.5 shows average yields of major crops in Soybeans 17 1Moldova from 1985-1992. Sugarbeet 83 5
Tobacco 28 2Forage crops 546 35
1.24 A high yielding crop sector is of which:economically justifiable in Moldova because of Silage maize 203 13the high quality soil and abundance of low cost Root crops 29 2labor. In recent years, the lack of key imported Perenn./ann. grasses 314 20
inputs, their high prices relative to product prices,
shortcomings in management, and recurrentdrought have depressed yields. In the longer run, Moldova's strategy should emphasize yieldenhancement, through public investment in seed research, free trade in agricultural inputs, rapidrestructuring and privatization of input marketing, and price and trade policies that give efficient accessto domestic and foreign markets. The key constraints to higher yields at present are poor service of theparastatal input suppliers, and lack of financing for high quality inputs.
Irrigation
1.25 Because of the low level of precipitation in much of the country and its annual variability,irrigation is important in Moldova. Annual water consumption in Moldova is distributed as follows:
Agriculture: 63%(53 % of this used for irrigation)
Drinking, public utilities 15%Industry 14%Construction, transportation 8%
100%
8 Chapter I
Average Yields of Main Field CropsTone per hectare
17
1i
15
14
13
12
11
10
9 _
2
7_
I-~~ 4
Wlnter Wheat Tobacco GropQsCorn Vegetab Ie
rop
1985 - 1989 Averaoe
m 199 - 1992 AvQrdgQ
Figure 1.5: Average Yields of Main Field CropsSource: Republica Moldova, Informatie Privind Problemele si Organizarea Activitatii de Protectie a MediuluiInconjurator
1.26 Although agriculture is a major user of water, only a small area is irrigated, and waterresources for additional irrigation are not abundant. Irrigation development started in Moldova in the1930s. The oldest system in existence is on the Nistru river and serves an area of about 50,000 ha. Moresystematic and intensive development began in the early 1960s. During the 20-year period 1965-85, morethan 200,000 ha were developed. Total irrigated area to date is 308,200 ha, or 12% of agricultural land.Figure 1.6 presents the evolution of irrigation and drainage development since 1960. The major irrigatedareas are divided into 48 major sub-regions, which total some 220,000 ha and range in size from about1,300 ha to 20,000 ha.
1.27 The irrigation strategy was based on construction of retention dams along the Nistru andPrut rivers. A secondary objective of the dam strategy was to maintain a year-round flow of smallerstreams which are not naturally perennial. The largest dam, Novonistrovskaya, is on the Ukrainian borderin the rayon Oknitsa; it holds 4.5 billion m3 and supplies water for 170,000 ha. On the upper Prut atKosteshte-Stenka there is another major dam holding 1.1 billion m3 and supplying 70,000 ha. In the farsouth, plans to utilize water from the Danube have been drawn up but not implemented.
1.28 About 50,000 ha have been drained from flood areas in the vicinity of major rivers,mainly along the southern parts of Nistru and Prut. The total length of areas drained along the rivers is
Introduction: Background to the Sector 9
about 1,500 km. The upland drainageproblem is not considered to be as MOLDOVAcritical, and drainage of upland areas Irrigation and Drainage Development
has been limited to a number of small Thousend he
areas totaling 10,000 ha.
1.29 Irrigation in Moldova Z 50 . .is of a 'stabilization" or 200 /complementary nature. Precipitationvaries between 550 mm in the north J59.. .and 400 mm in the south. About half 190 . ..the time, moisture is less than 50
adequate in the north. In the south,more serious dry spells occur during 19o 1985 1970 1975 19BO 198 198a 1987 1988 1989 1990 t99l 1992
six to seven years out of ten. About98% of water is delivered to crops -Irigtion : Dreinage
through various sprinkler systems S. AKVA -d Mix.of A4-.
supplied through buried pipes. Dripirrigation, which would be ideal for Figure 1.6: Irrigation and Drainage -1960-1992 (OOOs ha)
many of the high-value crops inMoldova, has been tried but was not successful. The main reason for the failure was the high organicmaterial content of the water, leading to frequent blockage of nozzles. More efficient water filteringsystems would have to be introduced in order to permit drip irrigation.
1.30 Although yields under irrigation should be high and stable, Moldovan irrigated crops stillshow quite variable yields and do not exhibit the expected average yield differential over unirrigatedcrops. Improved varieties and better water management could increase effectiveness of land underirrigation.
1.31 The parastatal AKVA Moldova is in charge of water management in agriculture. AKVAemploys about 18,000 people. It is comprised of 18 inter-rayon operation and repair units, 25 irrigationconstruction units, a factory in Bendery producing ferro-concrete pipes, an enterprise for polyethylenepipes, a research institute for water management and amelioration, a engineering projection institute"Akvaprojekt", an information gathering center and various other support units.
1.32 Farms do not at present pay for water. AKVA and its organizations are financed throughthe government's budget, and funds are inadequate for maintenance and operation. Major overhauls ofpumping stations, canals, buried pipes, roads and other infrastructure are overdue, and the decliningphysical infrastructure is reducing area irrigated. Introduction of user fees to pay for water andmaintenance of the irrigation system will be necessary to secure an adequate financial base for continuedoperation of the irrigation system.
D. LIVESTOCK
1.33 The prominence of livestock products in Moldova's agriculture at the beginning of thetransition (about 40% of the gross value of output) reflected a significant expansion of the Moldovanlivestock sector between 1965 and 1990. In 1971, Moldova had 1% of the cattle and 2% of the pigs in
10 Chapter 1
the USSR. By 1990, when both cattle and pig numbers in the USSR had increased substantially,Moldova's share of cattle remained at 1 %, but the share of pigs had increased to 3 % of the Soviet total.Between 1966 and 1990 the number of cattle in Moldova increased 22 % and the number of pigs by 67%.The number of poultry more than doubled.
1.34 Meat production and exports expanded substantially in the 1980s, and by 1991 about 20%of domestic production was exported. Since 1991, the loss of export markets in the FSU, high feedprices, and reduced domestic demand have squeezed the livestock sector severely. Meat production fell40% between 1991 and 1993. Milk production fell by 30% between 1991 and 1993, and egg productionby 46%. A continued decline is expected in 1994 as the drought worsens feed shortages.
1.35 Although production of meat, milk, and eggs has fallen substantially since 1990, reductionin animal numbers has been proportionately less. For example, reduction in animal numbers on January1, 1994 relative to January 1, 1991 was 17% for cattle and 40% for hogs, even though the decline inmeat production exceeded these rates. Animal inventories in collective and state farms, joint stockcompanies, and state complexes are falling faster than the total, and inventories in the household andprivate sectors are increasing. Numbers of cows, sheep, and goats in the household and private sectorsare rising the most, a phenomenon often observed as incomes fall and families turn to production of dairyproducts for home consumption.
1.36 Despite the fall in animal numbers, productivity per animal has not risen, but on thecontrary, it has declined. Milk yield per cow exceeded 3000 kg annually in Moldova prior to thetransition and declined by 30% since then. This decline is remarkable because the culling of cows shouldhave removed the less productive ones and thus increased average yields. The fall in milk yields willaccelerate with drought-induced feed shortages in 1994 and is symptomatic of continued serious problemsin the livestock sector.
1.37 Moldova's livestock production takes place in three organizational settings: (a) the largeproduction complexes that are similar to feed lots; (b) the integrated crop and livestock systems oncollective and state farms; and (c) the private household sector. The livestock complexes presentparticularly difficult problems. In 1990, there were 42 cattle complexes, 40 hog complexes, and 38poultry complexes in Moldova. These are specialized, capital intensive, enterprises dependent onpurchased feed. The average cattle complex in 190 had about 5500 head. Hog complexes had onaverage 30,000 heads, and poultry complexes about 350,000 birds. By early 1993, the complexes werereported to be working at less than 20% of capacity, but few had been closed. Efficiency has fallensignificantly. The amount of feed required to produce a kilo of meat has increased by 40%. At the sametime, the cost of concentrate feed itself has increased.
1.38 In January 1993, complexes held 17% of cattle outside the household and private sector,70% of the hogs outside the household and private sectors, and 70% of poultry. The role of thecomplexes in the livestock economy decreased in the first half of 1994 through herd reduction and closureof some complexes. The livestock complexes have not to date been included in the privatization program,and remain either state enterprises, or inter farm enterprises managed as state enterprises.
Introduction: Background to the Sector 11
E. HORTICULTURE AND VITICULTURE
1.39 Moldova's processed fruits, vegetables, and wines are the country's major exports, andmodernization of these sectors will be an important part of agricultural recovery. Historically mostexports have been to Russia, Ukraine, and other countries of the former Soviet Union. Qualitycharacteristics and packaging have developed with these traditional markets in mind. Products at the highend of the range of quality, such as pure apple juice concentrate and some wines, were sold in the pastin European markets. Placing larger volumes of processed products in Western markets will requireimprovement in product quality and packaging. With the increase in transportation costs to traditionalmarkets within the former Soviet Union, improved quality will be desirable for these markets, as well,since it is often uneconomical to transport low quality products over long distances. Moreover, increasedcompetition in Russia and the growth of a high income market there suggests that quality improvementswill be needed to retain and develop even traditional markets.
1.40 Potential areas of improvement encompass the full range of activities in horticulture andviticulture, from choice of variety, management of the crop, handling and sorting of raw products, andprocessing and packaging of finished products.
1.41 Land in orchards, vineyards, and vegetable crops occupies approximately 21% ofagricultural land. Tomatoes and green peas occupy the largest area among the vegetable crops, andapples and plums are among the most important fruit products. Performance of horticultural crops inrecent years has been variable. Vegetable production in 1993 was 39% of production in 1986, and thedecline is attributable to reduced area and lower yields. Yields have fluctuated widely along a downwardtrend. Reasons for the decline in yields include reduction in input use, particularly fertilizer, plantprotection agents, and fuel. Not all vegetable crops are irrigated, and the crop is thus vulnerable todrought. Available irrigation may not be used effectively, however, since irrigated yields have notexceeded unirrigated by the expected margin. A number of organizational and managerial problems alsoappear to contribute to low yields in horticulture.
1.42 Moldova is well known for production of wine and champagne. The industry can beimproved through increasing grape yields (by improving varieties, better access to high quality inputs,and changes in management), improved processing (consistently good filtration, reduction in the ageingperiod), and adoption of standardized packaging (bottles, corks, and labels).
12 Chapter 1
CHAPTER 2
THE CURRENT STATUS OF REFORM
2.1 Moldova's fertile land and abundant labor can support an agricultural sector specializingin high yielding labor intensive crops for export markets. In order for the sector to continue to developin this direction, reforms must be pursued to create an open and competitive sector based on privateownership. Agricultural reforms are part of a larger reform program encompassing macroeconomicstabilization, privatization, and reforms in pricing, trade, and the financial sector.
Macroeconomnic Program
2.2 Since late 1993, Moldova has been following a tight monetary policy supported by anIMF Stand-by arrangement. The program includes market allocation of most credit, substantial declinesin the rate of expansion in net domestic assets, and an estimated reduction in the overall fiscal deficitfrom 23% of GDP in 1992 to 7.5% of GDP in 1994. Strict ceilings have been placed on credit toGovernment from the National Bank of Moldova and the banking system. The program includes anincrease in government expenditure on the social sectors, as well as large savings in subsidies, togetherwith increases in tax revenue.
2.3 The macroeconomic program resulted in a reduction in inflation and in nominal interestrates in the first half of 1994. In response to the rapid fall in inflation from a monthly average of 20.5 %in 1993 to 3.0% in the sec.ond quarter of 1994, nominal average interest rates set at refinancing auctionsdecreased from a peak of 377% in March of 1994 to 79% in July, 1994. Real interest rates are high,and short term lending predominates.
2.4 Transfers from the budget to enterprises were cut to about 1 % of public expenditure in1993, and the consumer subsidies on bread and milk were eliminated in May, 1994. Authorities haveintroduced new taxes, removed some exemptions, and extended the scope of excise taxes. Payroll taxesin agriculture are now the same as in other sectors. Tax exemptions remain a source of distortions andrevenue foregone, however.
2.5 Success in maintaining fiscal discipline has been impeded by mounting arrears throughoutthe economy, between and among enterprises, and to, and by, the governmental budget. Tax arrears hadreached 150 million lei by March 1994. Overdue loans to the enterprises with government guaranteeshave been transferred to the budget, and arrears among enterprises and to employees are large.Enterprises are shifting to barter deals to avoid taxes and debt servicing. Thus although monetary policyhas succeeded in sharply reducing inflation, the combination of monetary policy, fiscal policy andadministration, and enterprise behavior is not yet balanced adequately to provide strong support forsustained stabilization of the real economy.
Land Reform and Farm Restructuring
2.6 Moldovan agriculture traditionally consisted of various forms of collective and statefarms, supplemented by production on household plots of farm employees. The collective enterprise
14 Chapter 2
remains the predominant type of farm. The policy on farm restructuring permits but does not requirestate and collective farms to reorganize and register as new types of firms. Of about 2800 state andcollective farms and interfarm enterprises in 1991, by January, 1994, 160 new types of farms had beenformed. Among these were 39 agricultural joint stock companies, 53 limited liability partnerships, 62agricultural cooperatives, and 6 associations of private farmers. By July 1994, the number of joint stockcompanies had increased to 63.
2.7 Land reform is linked with farm restructuring, and is proceeding in two stages. The firststage is substantially complete, although title documents have not yet been distributed to all new owners.In this stage, the household plots of members and employees of state and collective farms and gardenplots of rural residents and some urban families were augmented up to a maximum of 0.75 hectares perfamily. Average plot size after augmentation is 0.30 hectares per family. Tenurial status of this landwas changed from use right to private ownership, although land cannot be bought and sold until 2001under current law. The first stage of land reform encompassed approximately 325,000 hectares, or 10%of the total land area and 13% of agricultural land of the country. Most of this land was in householdplots prior to the land reform, but its tenure status was changed.
2.8 Of the remaining 3.0 million hectares of Moldovan territory, 1.9 million have beendesignated as subject to privatization, and 1. 1 million designated for the state land fund. The state fundincludes land of research and educational institutions, nature preserves, roads and bodies of water, andmunicipalities. Agricultural land subject to privatization is to be transferred in the second stage of landreform, which began slowly in late 1992, but accelerated in the summer of 1993, and continues atpresent. Agricultural land area subject to privatization in each local rural jurisdiction (primeria) isinventoried, and a list of eligible participants is drawn up. Each participant is entitled to a parcel ofaverage size and quality for that primeria, and receives the entitlement as a paper certificate. As ofFebruary, 1994, 312,000 people, or 35% of eligible recipients, had received land certificates.
2.9 Those who want to exchange certificates for actual identified pieces of land must registerintent to leave the collective or joint-stock farm, after which boundaries of a parcel will be determined.Intent to exit can be filed between November and April of any year, after fall crops are harvested andbefore spring planting. In Moldova, where land is extremely scarce, exit with land is the mainmechanism for creation of private farms. This differs from Russia and Ukraine, for example, wherecollective and state farms were required at an early stage to contribute tracts of land to a redistributionfund, which served as the source of land for almost all private farmers currently operating. There is noredistribution fund in Moldova, and holdings of private farms must be carved directly out of the collectiveand state farms, and joint-stock companies, within the primeria.
2.10 Data on numbers of private farms vary considerably according to source of reporting, anddefinition of private farm. The CIS statistical yearbook, compiled from officially reported statistics, lists3100 registered private farms in January 1994. In February 1994, an official of the Ministry ofAgriculture drawing on official statistics reported 7262 private farms formally constituted and registered,with average holdings of 1.2 hectares each. An additional 33,500 private farms were reported to befunctioning, but had not yet been formally registered, and hence were not yet legal entities. The landin registered private farms and in process of registration therefore constituted in early 1994 approximately50,000 hectares, or 2% of Moldovan agricultural land. By early 1994, approximately 15% of Moldovanagricultural land was privately managed, either on household plots or on private farms. A smallerproportion of land was formally titled in private ownership.
The Current Status of Reform 15
Privatization of Marketing and Processing
2.11 In 1993, with Parliamentary approval, the government started a mass privatizationprogram under which the population uses vouchers to buy public assets at auctions. Implementation ofthe program has been delayed for both political and technical reasons. The privatization of medium tolarge enterprises started in June 1994 with a pilot auction, followed by an auction of ten enterprises onJuly 27, 1994. The 1993/94 program includes 1,000 medium and large enterprises, some of which areengaged in food processing.
2.12 Although food processors are included in the voucher privatization program, specialprocedures apply for many of these firms. During preparation for privatization, 50% of the shares areset aside to be distributed to farms that provided raw materials in the past, in proportion to the volumeof supply. An additional 20% of shares are distributed to employees of the processing firms, and theremaining 30% of shares are offered at auction for vouchers. The intent of this provision is to encourageagricultural producers to become majority owners of food processing firms.
2.13 The privatization of food processing enterprises has several features that may slow theemergence of a more efficient and internationally competitive processing industry. The decision to grant50% of shares to suppliers of raw materials in proportion to past supply complicates the preparation forprivatization. The records of past supply must be examined, and shares calculated. Some of thesuppliers (state and collective farms) are themselves in the process of reorganization and privatization,and may have split into several units. Moreover, the initial privatization of these firms provides noopportunity for participation of foreign firms, which may wish to purchase large blocs of shares prior toundertaking substantial investment in modernization. The experience in food processing in Eastern andCentral Europe has shown that foreign investors generally seek majority ownership, and are unwillingto undertake substantial investment in its absence. A foreign firm seeking ownership of shares inMoldovan food processing enterprises would have to wait until completion of the initial round ofprivatization, after which the distributed shares become tradable to outsiders.
2.14 A number of firms engaged in food processing and marketing of inputs and output werenot included in the 1000 firms intended for privatization under the 1993/94 program. Among the firmsscheduled for the 1995/96 round of privatization are the large parastatal firms Fertilitatea, Arca Moldova,and Cereale that dominate marketing of agricultural chemicals, machinery, and grain, respectively. Theconsumer cooperative Moldcoop is not owned by the state, but has operated much like a state enterprisewith the instruction to manage rural retail trade. The parastatals do not hold juridical monopolies, butfew competing firms have entered the spheres of activity in which they dominate. These firms haveexperienced severe problems servicing debt and retaining liquidity. Their deteriorating performanceimpedes provision of essential services for agricultural producers and rural residents. Early restructuringand privatization of these firms, as scheduled in the 1995/96 privatization program, will make asubstantial contribution to agricultural recovery.
Price Policy
2.15 Under the Soviet price policy prior to the transition, the state set producer prices withquotas (state orders) for planned delivery, and offered price bonuses for deliveries above quota. Retailprices were set administratively, as were all prices at the level of processing and wholesaling. Thissystem was discontinued in January 1992. After this date the state no longer set all prices directly.
16 Chapter 2
Direct price controls were retained for bread and milk and several other foods until May 1994. Stateorders were retained for a number of products through 1993, but the volume of quotas was reduced.Procurement prices were mandatory for quantities purchased under state orders, and becamerecommended or "orienting" prices for deliveries above or outside state orders. Processors were subjectto controlled profit margins, and these controlled margins influenced the prices at which processedproducts were sold into wholesale and retail trade. Traders were subject to controlled marketing marginsthat varied by commodity, and set upper bounds on the prices an individual retailer could chargeconsumers. Thus although the state ceased to directly set food prices in January, 1992, a high degreeof indirect regulation was maintained through procurement prices, controlled profit margins, andcontrolled marketing margins. The state intervened directly in pricing of bread and milk by setting retailprices and providing subsidies to processors (flour) and producers (milk) until May 1994.
2.16 The system of regulated food pricing has undergone a number of changes since January1992. In July 1993, the government raised the procurement price for grain, replacing the former policyof indirect taxation of grain producers. The procurement price for wheat was set at 120,000 rubles($120) per ton. Although the procurement price was raised, it remained a controlled price. Whether thisprice actually was the border price for Moldovan wheat is unknown, since grain is not exported due toa de facto ban implemented through mandatory licensing of grain exports. Since Moldovan grain is notexported commercially, there are no current observations on actual prices received for grain of variousqualities in international trade. It is likely that $120 per ton was somewhat higher than the border pricewould have been for Moldovan wheat in 1993. The 1994 procurement prices are set at 400 lei/ton ($100)for wheat, 310 lei/ton ($77.50) for barley, 500 lei per ton ($125) for maize, and 700 lei/ton ($175) forsunflower. On world markets maize prices are lower than wheat by about 15%. Moldovan domesticprices in 1994 were therefore distorted when compared to relative prices on world markets. Thisdistortion provides inappropriate signals to economic agents.
2.17 Until early 1994 the controlled marketing margins imposed a substantial indirect tax ontraders, reducing liquidity and profitability. The marketing margins were set for most products atbetween 10% and 15%, and were applied to the nominal price at which the trader purchased the good.With inflation averaging 21% per month in 1993, the controlled marketing margins meant that mostgoods entering trade and held in inventory for half a month were resold at a loss. The distortion causedby the controlled marketing margins was reduced in late 1993 by increasing the allowable margin to 30%for most products and by the reduction in inflation to approximately 3% per month in mid 1994.Remaining margin controls are scheduled for removal in two steps, one in November 1994, and the otherin early 1995. In 1994 state orders were discontinued and a new mechanism of state procurement,purchase orders for state needs, was introduced. Purchase orders for state needs covered productsexchanged under bilateral trading agreements (see following section on trade policy).
2.18 In May 1994, price ceilings and subsidies for bread and milk were discontinued, and poorconsumers were offered cash payments to assist in purchase of bread and milk at the higher retail prices.The retail price of flour in Chisinau in September 1994 was reported to be 1.0 lei per kilo ($240/ton).If, as announced, the procurement price wheat is 400 lei (about $100, or somewhat more for millingquality), the relatively high flour price suggests that substantial gains may be achievable through increasedefficiency of the milling industry. The restructuring and privatization of Cereale, currently in the earlystages are important first steps in this regard.
2.19 Among prices reported for the capital cities of member countries of the CIS in September1994, flour was more expensive than in Chisinau in all cities except Dushanbe, but bread is more
The Current Status of Reform 17
expensive only in Moscow. Other cities retained price subsidies for bread, although flour prices appearhigh throughout the CIS. Moldova is thus among the early adopters of liberalized bread prices.
2.20 Direct administration and indirect regulation of agricultural prices in Moldova have beensubstantial in the past three years, although the extent of regulatory control declined in 1994. The roleof markets and market transactions in agriculture is still limited by several factors. Increased arrears inpayment between enterprises and uncertainty as to which debts will actually be paid reduce the relevanceof prices in economic transactions. Price competition is accordingly less important than in economiesin which terms of contracts are fully honored. Moldovan markets, like those throughout the CIS, are notyet fully linked with neighboring countries and with world trade, and the small domestic economy cannotprovide efficient price determination for tradable goods. The institutions that will eventually linkMoldovan producers with domestic and foreign markets, such as commodity exchanges and brokers, arenot yet developed. These institutions are needed in order to increase the commercial character ofMoldovan agriculture. Due to illiquidity and interruptions in trade links, the importance of transactionsin kind in agriculture has increased as producers seek to bypass financing constraints and to avoid taxes.Products that in the past were sold to commercial processors are now in part processed on commissionin kind and returned to the farms, where a portion is distributed to the work force in lieu of wages andbartered for inputs. As the role of monetary transactions increases in the future, the importance of priceswill similarly increase. Simultaneous progress on remonetization, increased financial discipline at theenterprise level, and growth of market institutions will be needed for prices to play a substantial role inthe Moldovan agricultural economy.
Trade Policy
2.21 A number of significant changes in the trade and exchange regime were implemented in1993 and the first half of 1994. Export controls have been lifted, with the notable exceptions of the defacto ban on export of grain, hides, and skins. The exchange rate is determined in a competitive market,and most current account transactions are free of restrictions. Changes in the import tariff initially tendedtoward reduction in rates and increased uniformity. In early 1994, however, protectionist pressuresurged, and tariffs on imports from outside the CIS or Romania were increased substantially, especiallyon foodstuffs. Under the tariff schedule of mid 1994 (which applies to imports from outside the CIS andRomania) most livestock products have tariffs of 30%, fruits and vegetables 50%, and tobacco andalcoholic beverages 100% or higher. Agricultural inputs, such as fertilizer, antibiotics, and feeds areexempt from tariffs.
2.22 Moldova retains bilateral trading agreements with countries of the former Soviet Union.The agreements establish lists of goods to be exchanged on a barter basis. Agricultural products dominateMoldova's exports under the agreements, and energy products dominate the imports. The Moldovangovernment procures products under purchase orders for state needs. These are similar to state orders,but the compulsion implied by state orders is softened. In 1994 purchase orders were used to procuremeat products, vegetable oil, sugar, tobacco products, wines, canned fruits and vegetables, as well asseveral nonagricultural products. In the present environment state procurement for trade under bilateralagreements often represents an opportunity to market rather than a requirement to do so, although thegovernment and its agents are not always able to pay in full and on time for products procured. Liketrade under bilateral agreements, direct international trade between enterprises is also subject to risks ofdelayed payment or nonpayment, in addition to risks of transport.
18 Chapter 2
2.23 On April 15, 1994, the Moldovan Parliament ratified the CIS Treaty and Economic UnionAgreement. Under the Agreement, trade among members of the Union is exempt from tariffs. Thetariff exemption of imports from the CIS implies a low level of aggregate protection, since imports fromthe CIS comprised 70% of all imports in January - May 1994.
Agricultural Finance
2.24 In response to the rapid fall in inflation from a monthly average of 20.5% in 1993 to3.0% in the second quarter of 1994, nominal average interest rates set at refinancing auctions havedecreased from a peak of 377% in March 1994 to 79% in July, or a monthly simple interest rate of6.6%. Interest rates were high in real terms during the first half of 1994.
2.25 In mid 1993 preferential credit with subsidized interest rates for agriculture wasdiscontinued, and agricultural borrowers thereafter borrowed at commercial interest rates. Directedcredit, some of which is for agriculture, comprised 20% of central bank refinancing in mid 1994.According to reports of the national Bank of Moldova, 96.6% of the 100 million lei of credit issued bythe NBM in the first half of 1994 was short term credit. Half (54%) of the credit of the NBM in the firsthalf of 1994 was reportedly extended to the agricultural sector through the credit auctions and directedlending, including primary production, procurement, and processing. Although this appears to be a highlevel of lending to agriculture, much of the credit is tied up in arrears among processors, and little canbe used to finance working capital for primary production. The main lender to agriculture isAgroindbank, which is also the largest bank in Moldova. An audit of Agroindbank was undertaken inlate 1994.
CHAPTER 3
A FRAMEWORK FOR SOLUTIONS
A. GENERAL FRAMEWORK
3.1 The long-term potential for improvement in Moldovan agriculture is very substantial.Because Moldova is densely settled and the land inherently fertile, a high-yielding labor intensiveagriculture is economically optimal, in contrast to other parts of the FSU, where the natural resource baseis inferior and density of settlement lower.
3.2 Improved management and exports from the crop sector, horticulture, and viticulture arelikely to be the foundation of recovery. The livestock sector will probably stabilize at a smaller size thanprior to the transition, and savings of feed and energy will be required to retain competitiveness ondomestic markets. The incentive system, must be allowed to reflect the advantages of the crop,horticulture, and viticulture sectors, pulling resources into these activities. This will happen naturally ifworld trading prices are transmitted into the domestic price structure, since opportunities to sell theseproducts on world markets are better than opportunities to sell livestock products. At present demandfor livestock products in Moldova's traditional markets is depressed, and quality problems in Moldovanprocessing technology make it difficult to sell meat on major markets outside the former Soviet Union.
3.3 In order for producers to respond to incentives and shift into more profitable activities,farms must not be allowed to accumulate indebtedness. If arrears are tolerated, price signals will losetheir operative impact.
3.4 The price of land should be allowed to reflect its scarcity and inherent fertility, as wouldhappen if land markets were allowed to function. The price of labor is likely to be relatively low ifdomestic labor markets are allowed to reflect the abundance of labor.
3.5 In the medium to long run, when quality-enhancing investments in food processing arein place, Moldova should be able to export processed products to hard currency markets. Already in1993 and 1994, exports of Moldovan apple products and wine to Western Europe increased. Moreover,incomes can be expected to recover within the FSU, improving the attractiveness of this market. In orderto take full advantage of opportunities to expand into new markets and to retain traditional markets,private investment in food processing will be needed. Accelerated privatization of food processing willtherefore enhance the market opportunities for the entire sector.
3.6 The government cannot directly engineer recovery and growth of the kind needed inMoldovan agriculture, even it if were to have at its disposal more ample resources than are currentlyavailable. The government can provide an enabling environment, and permit economic decision makersto generate growth themselves. Key elements of this environment are continued progress onmacroeconomic stabilization, adequate numbers of private firms, and a regulatory environment thatpromotes gainful activities and provides appropriate economic incentives.
3.7 Macroeconomic policy is discussed in separate reports, and recommendations in this areawill not be part of the agricultural sector review. The impact of macroeconomic policy on agriculture,through the exchange rate, the interest rate, and inflation is important. Moldova's macroeconomicprogram since the introduction of the leu in November, 1993, has achieved notable success in reducing
20 Chapter 3
inflation and instilling confidence in the new currency. The real economy continues to contract, however,and the monetary stability is fragile. Demand for credit is augmented by borrowing on the part ofenterprises that do not expect to repay, and this additional demand pushes up interest rates for allborrowers. Deficient screening of potential borrowers may appear to assist agriculture when agriculturalproducers are the borrowers, but in fact it does not assist agriculture. Lax screening and accumulatingarrears allow activities with low or negative returns to continue to absorb resources that could be moreproductively employed. Therefore continued effort to strengthen the implementation of themacroeconomic program by addressing the problem of enterprise arrears is important for continuedadjustment of agriculture.
3.8 Moldova has enacted programs of privatization and farm restructuring, including theopportunity to exit collectives and joint stock companies, but does not yet have a critical mass of agentsand enterprises responding entrepreneurially to the new environment. The slow pace of enterprise reformis due in part to weak financial discipline and lack of bankruptcy enforcement; state owned enterpriseshave been allowed to accumulate arrears and bid for credit that is unlikely to be repaid. In addition,implementation of privatization has been slow.
3.9 Privatization accelerated in mid-1994, with the first pilot privatizationof a large enterpriseat Orhei. The delay in privatization and simultaneous accumulation of arrears has resulted in a need toliquidate some enterprises previously scheduled for privatization. Liquidation and public sale of assetsmay result in greater mobility of assets and creation of new private firms.
3.10 Under the current system of regulations, the agricultural sector is granted preferentialtreatment in some areas, such as taxation, but penalized in others, such as trade policy (ban on exportsof grain and leather). Agriculture, as the strongest sector in Moldova's economy, cannot be penalizedif the country is to recover. Since agriculture is the dominant sector, however, it cannot be favored withspecial treatment when the need for fiscal revenues is so great. More importantly, Moldovan agricultureshould not need special treatment and protection to be competitive. Regulations to protect propertyrights, safeguard public health, assure quality standards commensurate with those of the EuropeanCommunity, and establish and protect the integrity of the financial system are of greater value toagriculture than are tax breaks and special treatment.
3.11 Supplying the missing components needed for recovery; that is, stability, entrepreneurialprivate agents, and regulatory reform presents administrative and political challenges more complex thanthe traditional management of the economy by directive. This approach is less costly in cash, however,than an effort by the government to finance recovery directly, through stimulatory subsidies and massivestate investment programs. More importantly, it is more likely to succeed than is the old approach ofsubsidies, targeted investment, and campaigns. The international community is already assisting infinancing the implementation of a viable reform program. The resources of the international communitywill of necessity be constrained, however, and policies that mobilize domestic savings and investment willbe of great importance, particularly for small-scale rural enterprises.
3.12 Short-run problems notwithstanding, Moldova cannot postpone introduction of the policiesand institutions that will make producers and traders maximally responsive to external and internaleconomic opportunities. There are several areas in which continued progress will be especially important.These areas include:
A Framework for Solutions 21
* continued progress in reform of price and trade policy and removal of marginregulations;
* further progress in privatization (including food processing, distribution, agriculturalservices, and input supply);
* affirmation of individual ownership of land, confirmed by titles. Land can be managedcollectively through leaseholds if owners so choose. Individual ownership is superior tocollective ownership of land, since it facilitates private investment in production.Collective ownership of land will impede mortgage finance, and will hence retard neededinvestment in the sector.
* Farm restructuring, including continued creation of new individual private farms, servicecompanies, and private farms formed by voluntary combination of individual shares.
3.13 The recurrence of drought in 1994 and concem about aggregate supply may make reformsmore difficult to implement. The dangers of delay, however, are readily apparent and are already havingan adverse impact, such as the high financial and physical losses in 1993 associated with problems inmarketing and processing. A constructively cautious approach to reform is one that moves forwardexpeditiously with implementation of programs already passed, particularly privatization and land reform,supplemented by needed changes in policy and deregulation, for example, in price policy, trade policy,and credit.
B. SOLUTIONS IN SPECIFIC AREAS
Macroeconomic and Trade Policy
3.14 The introduction of the leu in November 1993, and its subsequent strength and stabilitybrings producers closer to international suppliers of high yielding inputs, such as seeds, chemicals, feedadditives, and veterinary pharmaceuticals. Moreover, with the reduction of inflation, producers are ableto store earnings between harvest and purchase of new inputs. These are positive developments andshould be strengthened by requiring enterprises to settle arrears, and by continued progress toward fiscalbalance.
3.15 A number of additional changes in trade policy should be undertaken to facilitateagricultural exports and growth. Restrictions on exports of grain and leather should be removed toexpand exports and to require users of those products in Moldova to face world prices. Domestic usersof grain and hides will not have adequate incentives to improve efficiency if they buy these inputs atprices held low by trade barriers.
3.16 Tariff reduction for non-CIS imports is consistent with an outward-oriented sectoralreform program. Selective protection in specific instances of dumping or unfair trading practices can beintroduced if needed, but evidence of widespread dumping into Moldovan markets is not at presentstrong. The increase in early 1994 of protection against products from outside the CIS embodied in thenew import tariff structure should be changed to a regime closer to free trade. All import tariff rates inexcess of 20% should be progressively reduced to 20% within two years of the entry into force of the
22 Chapter 3
first tariff decree (i.e. by November 1995). Rates in excess of 50% should be immediately reduced to50% or less, and a schedule for further reductions should be established. The perpetuation of inefficiencythrough protection from competition can be extremely costly for the economy and for consumers. MFNrates should be applied to all countries of origin (except those where free trade agreements apply). Thiswill reduce distortion and will be required by GATT membership in the future. Duty exemptions forforeign investors and small businesses should be minimized, since they are difficult to administer and areunlikely to have much positive effect.
3.17 A number of changes in VAT and excise taxes should be introduced to facilitate exports.The application of VAT and excise taxes on a destination basis for CIS trade should be considered (afterdue consultation with other CIS members); that is, exports would be zero-rated and imports taxed. Thiscould increase the profitability of exporting. A VAT refund system should be considered for exports tonon-CIS countries, given the delays inherent in the current system of crediting such exporters for VATpaid.
3.18 Foreign exchange allocation should be further liberalized. Enterprises should be permittedto hold more than one foreign currency bank account, to stimulate competition amongst banks in theprovision of foreign exchange services. The portion of external credits that can be allocated by themarket should be increased. Where credit disbursement is in currency, it should be channeled throughChisinau Interbank Foreign Currency Exchange (CIFCE); where goods are supplied directly, they shouldbe auctioned. This will allow the benefits of such credits to be allocated to the most productive users.Explicit and implicit subsidies on imports financed by external credits should be eliminated, since theyare distorting prices, undermining domestic producers, and reducing budgetary revenues.
Price Reform and Competition Policy
3.19 Privatization, including continuing restructuring and privatization of the parastatalmarketing firms is essential for improved performance in marketing. Controls on trading margins shouldbe abolished, since they deter investment and may create shortages. The anti-monopoly legislation shouldbe reviewed to make it consistent with an open trading regime - monopolies will be few in number in asmall economy with free trade.
Reducing the Role of State Purchases
3.20 While bilateral trading agreements remain in effect, state procurement will be moresubstantial than subsequently, when trade contracts are negotiated directly between enterprises. Even inthis transitional period however, state procurement should be put on a competitive basis, with suppliersinvited to tender for fulfillment of the state's requirements. This will ensure that producers receivemarket prices. The state should endeavor to employ several procurement agents for each commodity,including private trading companies. This should improve the service that procurement agents provideto the state. Statutory rights enjoyed by state trading companies to be the sole purchaser or seller inMoldova of any given commodity should be removed, and competition should be encouraged by freeentry and privatization. Allowing free entry to trading will be critical to exposing the rest of the economyto prices determined in competitive markets. Traders and producers involved in centralized tradingthrough state purchases should be placed on an equal footing with their competitors. No preferences in
A Framewvork for Solutions 23
allocation of credit or inputs should be given. Such preferences reinforce the existing, inefficientstructure of production.
Privatization and Food Processing
3.21 Reorganization of Cereale, including separate privatization of units with differentfunctions, is currently in the design stage. The program should be finalized and implemented as soonas possible. Much of the capacity in storage and distribution of grains is held by Cereale. Privatizationof these facilities will be included in the reorganization of Cereale, and should be designed during 1994.Facilities for storage and distribution owned by the Ministry of Trade or by local governments shouldbe privatized under small-scale auction procedures.
3.22 There are many specific ways in which the food processing industry can be upgraded toproduce more competitive products. Some of these can be accomplished through technical assistance,or through improved management of the capital stock now in place. Most, however, require investment.Establishment of clear private ownership of the food processing industry is important because clearownership will encourage more foreign and domestic investors to invest. For enterprises included in the1993-94 privatization, it is desirable to move ahead to implement the existing program. For enterprisesnot included in the first round of privatization, it will be desirable to provide opportunities for foreigninvestors to participate directly in the privatization, rather than waiting until shares are distributed.Opportunities for foreign direct participation in investment are included in the design of the 1995/96privatization program.
3.23 Off-farm storage and distribution should be privatized, and competition in these activitiesshould be enhanced. Since such a large share of the national wealth is passing to members of collectiveand state farms through the privatization of land, farm assets, and processing, there is no economic reasonwhy storage and distribution facilities should be privatized in the same way, that is, to the farms that usethem. They could, therefore, be included in the general privatization scheme, and distributed againstvouchers. Alternatively, smaller facilities could be auctioned, either for vouchers or cash. The primaryobjective of privatization of these assets is to introduce better management and competitive behavior instorage and distribution.
Land Reform and Restructuring of Farm Enterprises
3.24 The goals of the agrarian reform, as stated in the Program of Agrarian Reform proposedby the government and approved by Parliament, are to improve productive efficiency by creating realownership of land and productive assets by individuals. The Moldovan program includes a detailedmethodology for allocating land rights, and this methodology is currently under implementation. Howto create new farm units once people receive rights to land and other assets is less well developed. Theoption of individual exit from a collective or joint stock company is straightforward, and some membershave exercised this option. Many people at this stage, however, do not choose to become individualprivate farmers for a number of reasons. Land shares are very small (from 1 to 2 hectares) and have tobe worked intensively to yield adequate income. Intensive production usually implies financing forpurchase of high yielding inputs. Financing is expensive, and many new individual farmers do not
24 Chapter 3
qualify. Land sales are prohibited until 2001, and input and product markets are poorly developed.Individual exit as private farmers at present is not attractive to many farm employees.
3.25 An alternative to exit as individuals is retention of the entire farm land, assets, and laborforce, re-organized and registered as a joint stock company or other collective enterprise. This is theoption initially encouraged by recommendations of the Ministry of Agriculture, although it is not the onlylegal alternative. The Moldovan authorities believed that this particular form of organization - one ofnine organizational forms recognized by the Law of Enterprises and Entrepreneurship - would allow thesmoothest transition from the existing farm enterprises with collective and state property to private farmsthrough the intermediate stage of collective management of privately owned land and assets. Althoughthe first farms to reorganize registered as joint stock companies, subsequently a number of limited liabilitypartnerships and agricultural cooperatives have registered. Many of these have involved a form ofcorporatization of the traditional farm intact, with little change in management or activity.
3.26 The expectation that joint stock companies and other corporate farming entities willperform better than the collective enterprises they replace rests on two critical misconceptions. The firstis that the current Moldovan joint stock farm resembles an American corporate farm. The second is thatcorporate farms dominate American agriculture. Most American corporate farms are family farmsincorporated for tax purposes, not companies with many shareholders. The Moldovan farm most likean American corporate farm would be a multi-family private farm with five or fewer families. Althoughjoint-stock companies in Moldova have some advantages over their predecessors, it would be prematureto consider reorganization complete once the joint stock company is formed. The reorganization is likelyto bring increased productivity when individuals have title to land and own real assets and make decisionsregarding their use. This can be accomplished within Moldovan farms if ownership of land (confirmedby title) passes to individuals rather than remaining with collectives. Individual ownership would notpreclude collective management of agricultural production through leasing of land to the collective ifpeople so chose. In this case, the farm would pay a competitive rental rate to landowners, competitivewages to laborers, and residual profits as dividends to owners of asset shares. At present, the joint stockcompanies formed in Moldova are much like collective or state farms. They do not pay members for useof land shares, and the return on the land is distributed in wages. Shareholders are employed on the farm(except pensioners) and their primary earnings are from wages and household plots. The joint stockcompany and similar collective forms of enterprise provide an organizational form that accommodatesthe new distribution of ownership, but does not bring new managerial strategies to the farm or create newbusiness structures.
3.27 In Moldova, as in other countries undergoing land reform, gains in efficiency will begreatest when new business entities, such as producer partnerships, associations, and small cooperativesare formed. The land reform mechanism does not prohibit consolidation of land and asset shares priorto exit, but neither does it promote consolidation by providing clear guidelines for the process.Administrators who wish to assist applicants for conjoined shares of land can do so, but moresophisticated consolidation and exchange of shares to create small businesses remains difficult. Inimplementation of the land reform in the coming season, it would be advisable to work with farmemployees and local authorities to ease the exit of employees who choose to leave in small groups, orwho wish to acquire a business unit in exchange for land and asset shares.
3.28 Many private farmers are not yet formally registered and this impedes their ability to havebank accounts and engage in transactions. Registration of private farmers who have already received landshould be accelerated. Advisory services for small farmers should be improved. This task should
A Framework for Solutions 25
initially be undertaken by the government, although eventually the private sector will provide serviceson a commercial basis.
3.29 A number of collective and state farms that have not yet reorganized are likely to do soin the future. Some may be forced to undertake quite fundamental restructuring if they cannot pay debtsand are not able to increase arrears. More detailed methodology for creation of new business units, suchas small firms selling machinery services, mid-sized farms, processing units, and transport companiesshould be developed. Internal auctions of physical assets for shares have served this purpose in somecountries undergoing farm restructuring.
3.30 As the distribution of physical pieces of land proceeds, work on registering and titlingof privately owned land should be expanded. At present, purchase and sale of land is prohibited until2001. The moratorium on transactions in land is harmful for several reasons. If land is to yield a highreturn there must be a working mechanism for reallocation of land from management under which returnsare low to better management. This can be accomplished either through sale or commercial leasing, butleasing is not reported to occur in Moldova enough to allow values to be observed. Leasing and purchaseare both features of well functioning land markets, and any legal obstacles to either kind of transactionin Moldova should be removed. As private ownership of land increases, it will be important that landmarkets begin to function for leasing, purchase, sale, and mortgage of land. The prohibition on sale ofprivate agricultural land until 2001 should be repealed. An analogous prohibition on sale of urban landhas already been repealed.
Demonopolization In Food Distribution
3.31 Privatization and farm reorganization can revitalize the agricultural economy only if thefarm input supply and product marketing sectors can function efficiently. Marketing and input supplyindustries should not be exempt from the general program of privatization. Nor should privatization ofmarketing and input supply be delayed beyond the time when substantial numbers of farms are privatized.
3.32 In 1993 production was good, but much of the crop could not be marketed due to liquidityproblems in the unrestructured processing and marketing firms. The experience of 1993 demonstratedthe harmful impact of delay in privatization of processing and marketing.
3.33 Large state monopolies (Cereale, Fertilitatea, ARCA Moldova) are undergoingrestructuring prior to privatization, and will be privatized in units that will act competitively, rather thanmonopolistically. A program to design the new units and implement privatization was designed in late1994 for implementation starting in early 1995, and this will include geographic and functionaldemonopolization. The government has requested technical assistance in preparing Cereale andFertilitatea for privatization. As plans are developed, it will be important to include opportunities forforeign participation in the privatization. Foreign presence on Moldovan internal markets for chemicals,grain, and machinery would improve services to producers. The experience with privatization of inputdistribution in Central and Eastern Europe has shown that where privatization is early and complete, asin Hungary, competitive markets begin to function early and well. Where privatization is delayed, as ithas been throughout the former Soviet Union, increasingly debilitated state firms serve producers poorlyand become a burden to the state budget.
26 Chapter 3
Rural Finance
3.34 The present rural finance system is very weak. Until mid-1993, credit was directed tospecific beneficiaries at subsidized interest rates. The subsidized interest rate is an inefficient device topromote agricultural growth in the long run. Interest rates that are lower than the inflation rate allowactivities that are unprofitable to remain in production, and also discourage domestic saving. Subsidizedcredit does not address the root problem of low or negative profitability, which is usually inappropriateprice policy, inappropriate technology, or poor management.
3.35 The reduction of inflation from 30-40% per month in late 1993 to 2.5% monthly in mid1994 has eased problems farms faced earlier in managing their finances in an inflationary environment.Nominal interest rates, however, remain much above the inflation rate, and real interest rates are high.Real rates are bid up by borrowers who may not intend to repay. Agricultural producers who borrowunder high real rates and do repay their loans do so by reducing or deferring wage payments. The highreal interest rates, along with growing inter-enterprise arrears, explain part of the growth in arrears inwage payments to farm employees.
3.36 In the first half of 1994 the National Bank of Moldova reported that 20% of its lendingwas targeted, and most of this was most probably agricultural. Virtually all lending is short term, andagricultural investment has largely stopped. Reduced use of credit for current inputs is leading to reducedcommnercialization of the sector and greater reliance on barter and payment in kind for internaltransactions.
3.37 Problems of high real interest rates can be addressed by further reforms in the bankingsystem, to increase loan repayment and reduce credit risk. Banks should evaluate and classify their loansaccording to the risk of the loans and set aside provision or risk funds to cover expected loan losses.Since August 1994, regulations requiring classification of loans have been in place. This precaution willhelp stabilize the system and force bankers to deal more quickly with bad loans. It is also necessary tostrengthen the capital adequacy positions of the banks.
3.38 At present, the large unrestructured state enterprises are absorbing a large share ofavailable credit, crowding out financing for potentially viable activities in agriculture and other sectors.Thus, accelerated measures to deal with credit demands of large risky borrowers will improve access ofother applicants for credit.
3.39 Although a stronger banking system will eventually serve agriculture better, theexperience of other transitional economies suggests that agricultural credit will remain problematic forsome time. Agricultural loans are risky, and banks seeking to strengthen their portfolios are reluctantto lend for primary agriculture. Moreover, until land markets function fully, agricultural producers canoffer little collateral to lenders who, in turn, want high collateral to counter perceived risk. The transferof Cereale's debt from Agroinbank to the budget in mid-1994 is an indicator that the agricultural creditsituation is far from settled.
3.40 As efforts to deal with the problems proceed, several simple measures may be of help.Applicants for funds should be required to produce a business plan demonstrating expected cash flowadequate to repay the loan and interest. New loans should be collateralized with a portion of the crop.New loans should not be issued to roll over bad debt of the past. For old debts that remain, the bank
A Framework for Solutions 27
and borrower should jointly devise a program of repayment. Liquidation of farms should be implementedif a program cannot be designed that is mutually agreeable.
3.41 Agroindbank is currently the main lender to the agricultural sector, and is likely to remainactive in the future. A number of new banks and financial intermediaries, such as credit unions, can beexpected to develop now that real interest rates for savers are positive. These organizations are oftenlocal and function by mobilizing deposits of savers and lending to loan applicants for housing, smallbusiness, and agriculture. Because Moldova's rural areas are so densely settled, the outlook for smallrural banks and credit unions is good.
Rural Communities
3.42 The density of Moldova's rural population presents a number of advantages, as well asthe obvious difficulties of pressure on land. Rural families are still somewhat larger than urban familiesand birth rates are higher than in urban areas, so the rural population is economically active and relativelyyoung. Eighty-five percent of the rural population lives in towns and villages of more than one thousandresidents, and 18% live in towns of more than 5000 people. Villages are close to each other and joinedby a road system better than most of the rest of the FSU. Unlike in more sparsely settled areas, the ruralpopulation constitutes a large potential market for goods and services that can be served at relatively lowcost.
3.43 This market provides opportunities for employment and earnings in rural small business.Assets currently employed in provision of rural services are owned either by the state (for example, storesunder the Ministry of Trade), the municipal government, the consumer cooperative, the collective andstate farms, or the joint stock companies. Schools, clinics, and hospitals within collective farms can beturned over to local governments during farm re-organization, at the decision of the farm, although littletransfer has taken place so far. The funding base for rural social services is not yet secure and will haveto be strengthened as farms transfer these obligations to municipal governments. Moldova's land tax issignificant, but in 1993, even at tax rates that were considered high, the revenue from this tax equalledabout one third of the cost of expenses for health and education in rural areas.
Agricultural Services: Marketing and Input Supply
3.44 Marketing at present constitutes a major constraint in Moldovan agriculture. Marketingof inputs is still dominated by the state owned monopolies Fertilitatea (chemicals) and Arca Moldova(machinery). The quality of service provided is low, largely because the firms are weak financially andhave not yet either restructured internally or adopted new managerial strategies. Input suppliers cannotat present offer supplier's credits, since they themselves are financially weak. Instead they requireprepayment.
3.45 Grain marketing is dominated by Cereale, another state owned monopoly. Marketing ofprocessed fruits and vegetables has traditionally been managed by the processing firms. These areindividual firms and many are included in the 1993-94 privatization program. Due to financialdifficulties, processors have increasingly withdrawn from participation in marketing and instead returnthe processed products to the farms for further disposition.
28 Chapter 3
3.46 Moldcoop, the consumer cooperative, dominates rural retail trade. Although not formallystate-owned, and thus not subject to privatization, Moldcoop is not a cooperative in the tradition ofwestern consumer or marketing cooperatives. Because of its importance to rural trade, Moldcoop in thepast was subject to a number of regulations. These served to decapitalize it (margin controls, requiredservice in remote areas). To keep rural trade functioning, Moldcoop was granted large amounts ofpreferential financing. As a consequence the organization is currently a major debtor and has anunwieldy structure and suboptimal geographic dispersion.
3.47 Privatization, restructuring, and divestiture of assets of the parastatal marketing firms andMoldcoop are needed to improve service, increase competition, and reduce the burden on the budget.Preparatory work is underway at present, and implementation of the privatization and restructuring shouldbegin in 1995.
Strengthening the Government's Supportive Role in Agriculture
3.48 The role of the Ministry of Agriculture in a market economy is to provide essential publicsupport services, such as extension, education, and research, to implement regulations in the areas ofphytosanitary controls, health and safety, and veterinary controls, to implement the government'sagricultural programs, and to evaluate sectoral performance and the impact of alternative policies. In itsrole as a provider of services, the Ministry will share the field with the private sector, since private firmscan be expected increasingly to be active in provision of advisory services and in agricultural research.
3.49 Sectoral recovery requires strong intellectual leadership and public education to articulatethe problems of agriculture and identify solutions consistent with the overall reform program. TheMinistry of Agriculture and Food should provide intellectual leadership for the debate on agriculturalissues within the more general dialogue about economic reform. This leadership should include a visionof a more prosperous agriculture constructively imbedded in a market economy.
3.50 A number of changes will be required in the structure and function of the Ministry ofAgriculture and Food and in the government's role in the sector. The diminished role of government ina market economy, and the fiscal constraints of the current period of crisis argue in favor of a smallerMinistry focused on the legitimate tasks of the public sector. Although the size of the Ministry hasdeclined since 1990, many of the functions of direct administration of production and processing havebeen retained. The Ministry is not yet sufficiently strong in analysis of policy or dissemination of marketinformation.
3.51 In order to facilitate reorganization of the Ministry better to serve its new functions, astudy leading to a design of a new structure should be undertaken and the new structure adopted.Implementation will require additional resources for training and equipping the new departments.
3.52 The scientific institutes merit special attention as organizations whose functions willremain useful, and indeed may gain in importance as Moldova becomes integrated with the global marketeconomy. These institutes vary substantially in vigor and quality. In 1993 they absorbed a small shareof the budgetary expenditures for agriculture (6%). Some of them also have substantial non-governmentalfunding.
A Frainework for Solutions 29
3.53 Some of these institutes have encountered special difficulties. Several were prestigiousAll-Union Institutes, formerly funded by the budget for the whole Soviet Union. Many of the institutesretain large numbers of scientists, typically over 100, and some have become successful commercially.The Corn and Sorghum Institute has become self-financing by supplying hybrid seeds to former Sovietrepublics, notably Ukraine and Russia, as the seed industries of these republics have been hard-hit bynatural and political disasters. The Wine-Grape Institute is said to be the most powerful currently, withabout 250 scientists, financed largely with industry funds. Overall, the institutes remain a large enterprisein comparison to analogous agricultural research organizations in industrial market economies. Moldovahas about 130 agricultural research scientists per 1 million population, while the United States has about20 publicly employed agricultural research scientists per I million population (plus an approximatelyequal number of privately employed agricultural scientists). Many of the commercial activities of theresearch institutes belong in the private sector, while core research activities of the institutes should beretained with adequate public funding.
3.54 The task of advising agricultural producers on new practices and technology is usuallyshared by the private and the public sectors in market economies. Private consulting firms sell advisoryservices, and public extension officers provide advice, either free of charge or with partial cost recovery.In Moldova parts of this function are now distributed between and among the Ministry of Agriculture andFood, parastatal input suppliers, the research institutes, and the specialists on the collective and statefarms.
3.55 The entire system of agricultural research, extension, and education will be revised in thecoming years. Linkage in education and research should be retained with Ukraine, Russia, Belarus, andRomania, and expanded with international professional associations. There is a clear need at present toprovide more public information on prices in relevant markets, on methods and implications of landreform and farm restructuring, and advice to small-scale producers.
3.56 Moldova's intensive agriculture will continue to require a high level of skill on the partof farm operators. Support for agricultural education and research is an essential service of government,and one that complements activities of the private sector. Curriculum reform, training, and re-equipmentof institutions of higher education is an area of high priority for public investment.
Environment and Natural Resources
3.57 Moldova's most valuable natural resource is its soils. However, erosion is worsening andis currently reported to be a significant problem on almost half of the arable land. The area of erodedland is estimated to have increased 45 % over the past 23 years.
3.58 The main reasons for the increase in soil loss appear to be: excessive large-scaleconversion of hilly pasture and meadow lands to annual crops, increased size of fields, little attention toerosion control and soil-loss management, and deterioration of erosion-control works. Some of thesecausative factors will be reduced as land reform proceeds, since the incentives that arise from privateownership of land will be more conducive to control of soil erosion than were the incentives under centralplanning. This will not happen automatically, however, and recipients of land will need increasededucation on soil management. Alternative rotations, minimum tillage techniques, improved contourplowing, and better management of slopes are among needed changes, and these should be addressedthrough education and extension.
30 Chapter 3
3.59 Because of the prevalence of soil erosion, and past heavy use of agricultural chemicals,it is likely that Moldova has problems of groundwater and surface water degradation. Higher prices foragricultural chemicals have already reduced use, and a switchover to environmentally safer chemicals thanthose traditionally manufactured in the FSU is already underway.
3.60 Improvements in water quality and soil conservation should be pursued throughestablishing ownership of land, proper pricing of chemicals, and education regarding land managementand chemical use. In the current circumstances, it is not recommended that costly public investments beundertaken in land reclamation, since funds in the budget are scarce and private landowners willundertake some of this activity, or should at least share in its cost. Problems should be monitored andmanagerial techniques that reduce problems or at least prevent their exacerbation should be part of theeducation and advisory program of agricultural extension.
3.61 Residual stocks of harmful chemicals on farms present an environmental and public healthproblem requiring attention. A program to inventory these stocks and devise measures either for disposalor safer storage should be included in the program of technical assistance for Moldova's agriculture.
C. ACTION PLAN AND PRIORITIES
3.62 A matrix illustrating objectives and recommended measures to achieve them follows atthe end of this section, in Table 3.1 and the accompanying matrix. The recommended actions are of threetypes: changes in the regulatory regime, structural changes of enterprises and markets, and introductionor augmentation of public investment.
A Framework for Solutions 31
Table 3.1: Recommended Actions
Measures to Assist Recovery of Moldovan Agriculture
Regulatory reform- repeal prohibition on export of grain, skins, and hides- repeal remaining controls on marketing margins- review, revise, and enforce phytosanitary and health controls consistent with those
of the European Union.- reduce tariffs on imports of agricultural products from outside the CIS and Romania, so
that agricultural protection is low and approximately equal to protection in other sectors.
2. Structural Reform- privatize Cereale, Fertilitatea, and Arca Moldova- restructure Moldcoop- prepare methodology for reorganization of state and collective farms into smaller
independent business units in primary production, processing, and services- privatize remaining livestock complexes- accelerate registration of private farmers- accelerate distribution of title documents- repeal prohibition on purchase and sale of land- design reorganization of Ministry of Agriculture and Food
3. Public Investment- provide domestic and international market information- maintain core agricultural research activities- reform agricultural education and provide stronger funding for it
Proposed Action Plan for Moldova's Agricltural Sector
RECOMMENDATIONSOBJECTIVES GENERAL MEASURES
APPROACH ALREADY TAKEN FIRST STEPS SUBSEQUENT ACTION
Improve efficiency of farm Land Reform and Farm - Legislation in place for land - Implement land reform and - Expand work on landenterprises Reorganization reform and farm reorganization farm restructuring according to cadastre, registering, and
existing law. Distribute , titling- A small number of private certificates of land shares byfarms have been established November 1994.
- Some reorganizations of - Design methodology forcollectives into 'joint-stock creation of independentcompanies' and other forms business units from state or
collective farms.- Households given ownership ofhousehold plots - Repeal moratorium on land
transactions to permit buying,selling and leasing of land.
Improve price incentives Develop private competitive - Direct administration of pricing - Reduce and then eliminate all - Disseminate marketfor producers product markets and allow by state modified to indirect mandatory state orders. information
these markets to determine administrationprices - The State should publicly bid
for needed quantities at marketprices
- Remove remaining barriers toexports of agriculturalproducts, such as prohibitionon export of grain, hides, andskins
Increase efficiency of input Restructure input supply - Design restructuring of - Disseminate marketsupply organizations and then parastatal input suppliers in information
privatize them 1994, privatize resulting unitsas soon as possible _
RECOMMENDATIONSOBJECTIVES GENERAL MEASURES
APPROACH ALREADY TAKEN FIRST STEPS SUBSEQUENT ACTION
Improve efficiency of Demonopolization and - Privatization program for much - Privatize plants of multiplant - Publish information on pricesmarketing and reduce privatization of food food processing adopted, and enterprises as independent in different consumer marketsproduct losses processing and distribution preparation for privatization units
underway - Maintain public investment in- Privatize small-scale roads, railroads, and
- Some restrictions on farm-to- transport, such as trucks communicationsretail markups repealed
Improve financial services Institutional reform and - Audit of major banks - Enforce bankruptcyfor agriculture privatization in the banking completed legislation
system
Rural Community Restructure provision of - Legislation opens opportunity - Secure tax revenues for local - Maintain public investment inDevelopment social services and improve for farms to transfer social governments so that social roads and other needed
rural infrastructure services to municipal services can be moved off infrastructuregovernments accounts of farms
Promote private small - Privatize many rural servicesbusiness in rural areas
Improve environmental Public education, Switchover to safer agricultural - Inventory and devise strategy - Advise farms on improvedquality investment, and chemicals begun for disposal of stocks of rotation practices, erosion
environmental regulation harmful chemicals control measures, and chemicaluse as related to water quality
Strengthen property rightsin land and educate owners - Increase extension workin techniques of land increasing integration ofconservation livestock into cropping and
improve use of manure.
34 Chapter 3
TECHNICAL ANNEXES
TECHNICAL ANNEX 1
LAND REFORM AND RESTRUCTURING OF FARMS
A. HISTORIC BACKGROUND
Al. 1 The Soviet economic agricultural model began to be introduced in most of Moldova onlyafter 1944. In 1950, collective and state farms jointly cultivated 1,661,000 ha, or 89% of all sown land.The proportion of land cultivated by individuals dropped to 204,000 ha, or a mere 11 % of all sown land(Narkhoz Moldova). In ten years, between 1940 and 1950, the roles of individual and collectiveagriculture in Moldova completely reversed, with individual agriculture shrinking to the status ofsubsidiary household farms.
A1.2 With the completion of collectivization of agriculture in 1950, agricultural production inMoldova, similar to the rest of the Soviet Union, was organized in two types of centrally controlledlarge-scale socialized farms, the collective kolkhozes and the state-owned sovkhozes.
Al1.3 The kolkhoz/sovkhoz system was augmented by interfarm enterprises: these were largecooperative enterprises jointly owned by several farms, which constituted a particularly importantcomponent of the agricultural sector in Moldova. Interfarm enterprises in Moldova accounted for around15% of agricultural product in the 1980s. They include large-scale orchards of thousands of hectares, aswell as pig complexes, feedlot operations, and poultry factories. In the past, interfarm enterprisesprovided 80% of pork and 90% of eggs and poultry in Moldova. They have never been self-sufficientin terms of feed supply and Moldova traditionally imported 1-1.2 million tons of grain. The relativelyhigh weight of interfarm enterprises is a unique feature of Moldovan agriculture, as in the rest of theUSSR interfarm enterprises account for only 2%-3 % of agricultural product.
Al.4 In addition to these centrally organized sectors, an important part of agriculturalproduction in Moldova (around 18% of the total agricultural product between 1970-1990--lower than the25%-30% figure reported for Russia, Ukraine, and the USSR as a whole) has traditionally originated inindividual subsidiary farms, such as household plots of individual kolkhoz members and sovkhozemployees and garden plots assigned to city workers.
B. LAND REFORM LEGISLATION
A 1.5 Private ownership of land and production assets is the foundation of the radicaltransformation in agriculture. The first enabling Union-level legislation was passed by the USSRSupreme Soviet between November 1989 and March 1990 (the Law on Leasing, the Law on Property,and the Law on Land). These laws permitted individuals and families to hold long- term leases on landwithin and outside the collective and state farms and allowed the granting of individual proprietorship(vladenie) over land. Proprietorship gave lifetime inheritable rights to work the land, but not the rightto buy, sell or mortgage it. These laws also authorized local governmental bodies to grant land forindividual farms where the management of the collective or state farm was unwilling to do so. ThisUnion-level legislation delegated important powers to the republics to pass additional laws on thesesubjects to provide essential details and mechanisms for the legal process of establishing private landownership and private peasant farms.
36 Technical Annex I
Al.6 In July 1990, when Moldova was still part of the Soviet Union, Moldovan Parliament(then Supreme Soviet) adopted a resolution "On the Conception of Transition to Market Economy" whichacknowledged the market economy "as the model of economic activity and the main path toward therecovery of national economy." Today, Moldova can rely on an impressive set of laws which have beenpassed since 1991 (Table TA1.1). The basic legislation required for privatization and restructuring of theagricultural sector is largely in place and, contrary to the situation in some other former Soviet republics,the reform process is not hindered by lack of an adequate legal framework.
Table TALI.: Moldovan Legislation on Land Reform and Farm Restructuring
Law on Property January 22, 1991
Law on Priority Social Development of the Villageand the Agro-industrial Complex in National Economy February 15, 1991
Law on Privatization July 4, 1991
Presidential Decree on Reorganization of State Enterprisesinto Autonomous State Enterprises and CommercialJoin-Stock Societies December 9, 1991Land Code December 25, 1991
(effective Jan. 1, 1992)
Law on Peasant Farms January 3, 1992
Law on Entrepreneurship and Enterprises January 3, 1992
Law on Joint-Stock Societies January 3, 1992
Law on Bankruptcy January 3, 1992
Law on Leasing January 14, 1992
Law on Cooperation January 16, 1992
Government Resolution on Settling of Land Disputes March 5, 1992
Al .7 The conceptual basis for land reform and farm restructuring in Moldova is the so-called"Conception of Agrarian Reform and Socio- Economic Development of the Village" approved byParliament on February 15, 1991. This is a comprehensive document that sets out the goals and principlesof agrarian reform in Moldova, discusses property rights and formation of market relations, and examinesthe organizational forms within the agro-industrial complex. The conceptual document was accompaniedby an implementation program.
A1.8 In line with the Law on Property, the Land Code recognizes three forms of landownership; private land, state land, and collective land.
Land Reform and Restructuring of Farms 37
Al.9 Land may only be owned by Moldovan citizens: foreign ownership is not allowed.Moreover, the Land Code explicitly states that "There will be no restitution of land to former owners andtheir heirs. They are entitled to receive land plots in ownership under the provisions of the present Code. "This is the legal answer to a potentially complex issue in a country where most land was privately owneduntil 1944.
AL.10 In addition to defining the category of private land ownership, the Land Code sets outprocedures for allocation and distribution of agricultural land to private individuals and other owners. Themain group of individuals who are entitled to own farmland are the members and workers of kolkhozes,sovkhozes, and other agricultural enterprises, regardless of whether the are actively engaged in agricultureor not. This includes kolkhoz/sovkhoz pensioners, all administrative and professional staff, as well asworkers of the social sphere to the extent that they are kolkhoz/sovkhoz workers. Another category areformer landowners who "surrendered" (a euphemistic term used by the law) their land to collective farmswithout actually joining them and are now willing to resume active farming. They are not entitled torestitution of their former holdings, but are entitled to receive some farmland with all the rest. The thirdcategory includes individuals persecuted by the former regime and since rehabilitated.
Al.11 Each individual in these categories is entitled free to a share of farmland of standard equalsize, which is to be established allowing for land quality in each particular case ("land equivalents").Since all farmland in Moldova is cultivated by collective and state farms (kolkhozes and sovkhozes), theland shares are created by dividing the total farmland of these farm enterprises among the eligibleindividuals. The actual division of farm-enterprise land into individual shares is carried out by local landcommittees established jointly by local (village or district) government and the farm enterprises. Theownership rights to a share of land are certified by an official document. It should be stressed that theLand Code provides a procedure for allocation of "land shares" and not physical distribution of landplots.
Al .12 The Conception of Agrarian Reform, which provided the conceptual base for land reformlegislation in Moldova, recognizes the existence of subsidiary household plots as a distinct entity fromfarm-enterprise land. It accordingly envisages a two-tier land allocation process. The first stage (whichbecame known as "small privatization") focuses on the household plots and the second stage ("largeprivatization") proceeds with allocation and distribution of lands cultivated collectively by the farmenterprises.
Al.13 The process of "small privatization" itself is divided into two steps:
a) Transfer of household plots to private ownership: All individual plots of rural residentsnot exceeding 0.3 ha per family are transferred free to private ownership;kolkhozes/sovkhozes workers with less than 0.3 ha are entitled to receive additional landup to this minimum.
b) Augmentation of household plots: Rural families of more than three persons (the size ofan average rural family in Moldova is 3.5) receive free additional land based on amaximum of 0. 1 ha per person, but the total land area (including the currently existinghousehold plot) must not exceed 0.75 ha per family.
Al.14 During the second stage, or large privatization, the allocation of land shares and titledocuments to individuals does not stop or interrupt the functioning of existing farm enterprises (kolkhozes
38 Technical Annex I
and sovkhozes). They retain the status of a collective enterprise with collective land ownership, whichis created by pooling the individual land shares in accordance with the provisions of the Law on Property.Each individual, however, has the right to exit the farm enterprise, taking with him or her the share ofland in the form of a physically delineated plot as well as the share of non-land assets of the farmenterprise (calculated according to latest balance sheet values). The physical distribution of land and assetsto exiting individuals is handled by the local authorities and does not require any decision by the generalmeeting of the farm enterprise members or farm enterprise management. Individuals who exit thecollective enterprise with their share of land and non-land assets become "private producers", i.e., privatefarmers, who further have the right to form associations retaining their ownership of land and assets.
Al. 15 The Land Code allows leasing of land by "physical and legal bodies". Private land ownersmay lease their land to others, even though sale of land is restricted. Foreign nationals may lease land,although they are barred from owning land. The Land Code also provides for payment of land tax basedon quality and location. In 1993, the land tax was increased from 500 rubles per hectare to 6000 rublesto allow for inflation. The land tax revenues are shared by local authorities and the national budget.
Al. 16 The Land Code, in its December 1991 version, does not include explicit restrictions onland transactions (sale and leasing of land). It includes three very general provisions:
- privately owned land is inherited "in accordance with acting legislation";- ' "alienation of land in the life of the owners is allowed in strict compliance with acting
legislation";- the state has the right of first refusal to purchase land offered for sale.
Yet the Conception of Agrarian Reform, which provides the underlying principles and guidelines for allrelevant legislation, explicitly allows land transactions starting only January 1, 2001, i.e., after a ten-yearmoratorium. The list of land transactions subject to moratorium includes "buying and selling, mortgage,inheritance, giving as a gift, exchange, leasing, and other legal transactions".
Al. 17 Moldovan farm reorganization is proceeding slowly and with retention of much of theinherited structure. Farm enterprises are not faced with any deadlines for reorganization, such asdeadlines for asset valuation and share distribution.
C. SHAREHOLDER STRUCTURES
Al. 18 The 1991 Conception of Agrarian Reform in Moldova introduced the notion of divisionof land and assets into individual shares. These are basically "conditional shares" that represent the shareof each individual in the total assets of the farm, without attempting any physical division of land orassets. These shares are still nontradeable and can be used (e.g., exchanged or swapped) only within theexisting farm structure. Physical distribution of land and assets is performed only for individuals whodecide to leave the farm enterprise and establish a private farm. Typically only a few individuals leavethe collective taking physical possession of their land and asset shares.
Al.19 The distribution of land and asset shares, with their superficial and possibly misleadingsimilarity to common-stock certificates, has led in Moldova to the virtually universal endorsement of thejoint-stock society as the preferred structural form for the reorganizing kolkhozes and sovkhozes. The
Land Reform and Restructuring of Farms 39
joint-stock society is viewed in both academic and government circles as the best possible form that willenable the farm sector to combine the advantages of existing large-scale facilities with the efficiencies ofprivate ownership. The Moldovan conception treats the entire existing farm enterprise as a joint- stockcorporation, and this is probably its main weakness.
A1.20 On the narrow level of legal technicalities, a shareholder who decides to "leave" ajoint-stock corporation (i.e., disinvest) must find a buyer for his shares. The corporation itself cannotredeem the shareholder's share for cash or physical property. This is indeed the dry legal language ofthe Moldovan Law of Joint-Stock Societies. The Moldovan proposal that only the non-land asset sharesare invested while the land shares are leased to the corporation solves only the land half of the problem.The legal structure of joint-stock societies may seriously restrict the freedom of individuals to choosebetween remaining in the collective structure or leaving it to become an independent farmer, thusundermining the whole philosophy of transition to a market- oriented economy.
A1.21 On a more substantive level, the model of a joint-stock society derived from a collectivefarm enterprise is similar in concept to the labor-managed firms in Yugoslavia or to the companiesmanaged by so-called enterprise councils in Hungary. These labor-managed structures, once very popularoutside the agricultural sector, have largely failed in East European countries. While better than theSoviet administrative-command structure, the organization is inefficient in the long run because ofpervasive free riding and lack of a real feeling of ownership and involvement. Also, the short-runconsumption preferences of the worker-owners may prevail and long-run capital investments may beneglected. The decision processes in such organizations are diffuse, it is impossible to assign individualresponsibility, and the worker-owners continually press the "friendly" management for higher salaries andgreater social benefits without greater personal productivity.
A1.22 Even though some Moldovan farms have by now reorganized into subcooperatives,collections of private farms, and joint-stock societies, subfarm units continue to rely on the old kolkhozor sovkhoz for purchases of inputs and sales of outputs. This is unavoidable in the absence of functioningmarket channels for farm inputs and farm products. The issue of the monopoly of large-scale farms inpurchasing, marketing, finance, and other service areas is extremely important for understanding theattitudes of members of the existing kolkhozes and sovkhozes toward privatization and reform and forassessing whether the reforms to date have improved or will improve resource allocation and efficiency.The obvious way to "break" this monopoly is by ensuring that when the reforms occur, the propertyrights related to acquisition and sale of outputs are not bundled with the original farm structure.
D. PRIVATE FARMING
Al.23 The Conception of Agrarian Reform recognizes private farms as one of the componentsin the new diverse economic system for Moldova.
Al.24 While the activity of a peasant farm is based on family labor, hired labor is explicitlyallowed by the law "when necessary for production". A very important provision of the law ensurescontinuity of all social rights (state pension, social security, national insurance) of private farmers: theydo not lose any of their accumulated social rights on leaving the kolkhoz and the accumulation continuesduring their tenure as a private farmer.
40 Technical Annex 1
A 1.25 The creation of a new private farm includes the following stages:
- obtaining land in private ownership from the collective farm enterprise and/or leasingland from the farm enterprise or the local council;
- obtaining a share of assets from the collective farm enterprise;
- registering the private farm with a "corporate" name (usually the name of the head offarm);
- preparing stamp, letterhead, and other "corporate" paraphernalia;
- opening a bank account and establishing the right for financial transactions through thebank (this is a comparatively complicated bureaucratic procedure in Moldova).
Al.26 Administrative support for land reform and farm restructuring was relatively weakthroughout 1992 and explains in part the slow progress on the second stage of land reform and theemergence of private farmers. Support strengthened in Spring of 1993 with the appointment of a DeputyMinister for Agrarian Reform and a more active program of work with district level governments.
A1.27 The legal mechanisms of distribution of land and assets in the form of shares in theformer collective property are designed to make the individual person the owner. Many members ofcollective farm enterprises may choose at this stage not to become individual farmers by separating fromthe collective, because of uncertainty, lack of developed market structures, and because land shares areso small (one to two hectares). It is important, nonetheless, that individuals receive full title to landidentified within specific boundaries. Improvement in Moldova's vineyards and orchards will requireinvestment in improved varieties. In most cases, land will have to serve as security for these investments.Without individual title, a system of private lending secured by mortgage cannot develop. Future growthin the vineyard and orchard sector depends critically on the speed with which land reform is deepenedand individual holders of land shares become genuine owners of land.
A 1.28 Because individual title is granted only upon exit from collectives, and because individualprivate production is unattractive to many holders of land shares, the current approach to land reform andfarm restructuring may slow investment. It would be desirable to define a methodology for creation ofbusiness and production units intermediate between the full traditional collective and the individual farm.An administratively feasible approach would be to devise guidelines for partnerships and small groupsof producers to exit as groups with contiguous parcels held in individual title. The organizational formcould be either corporate or cooperative (depending on whether the firm or individuals owned the land).In either of the latter cases it would be relatively simple for a bank to secure a loan, either through pledgeof corporate land, or joint pledge of individual land. The latter alternative is likely to be feasible onlyfor small cooperatives.
TECHNICAL ANNEX 2
ANNUAL CROP PRODUCTION
A. HIGHLIGHTS OF THE CROP SECTOR
Annual Crops Production
A2.1 Moldova has good to excellent conditions for production of a great variety of crops,including a number of high value crops, such as fruits, grapes, aromatic and medicinal plants, as wellas industrial crops including sunflower, sugarbeet and tobacco. Although the country has some of thehighest yields of the former Soviet Union, the research establishment and even more importantly the bestkolkhozes and sovkhozes have demonstrated that in most crops the realistic yield potential is beingrealized only to 50-60%. In order fully to realize the promising crop production potential a moreconducive economic environment must be introduced. Modern technology, including high yieldinggenetic materials, agrochemicals, advanced mechanization, improved irrigation, post-harvest handling andstorage must be made available to farmers.
Seed Production
A2.2 Moldova has good to excellent agro-ecological conditions for production of high qualityseed and vegetative material, and has first class scientists who developed some of the best vegetativereproductive materials in the FSU. Consequently, seed production is an important component of theagricultural sector in Moldova, not only for domestic consumption but also for export. The past strengthof the seed industry does not imply that the industry can automatically compete under current and futurecircumstances, or that Moldovan producers are adequately served. Specialists on the World Bank missionobserved that the seed industry is strong, but that performance must be improved if the industry is to becompetitive.
A2.3 The main difficulties the seed industry faces include inadequate access of Moldovanbiological scientists and plant breeders to state-of-the-art germplasm, modern plant propagation technologyand breeding techniques, resulting in production of vegetative materials with a yield potential generally30-40 percent lower than in the world's most advanced countries. A lack of financial means, lack ofinformation and exchange of genetic materials, lack of personal contacts and exposure of Moldovanscientists to more advanced research establishments abroad are mainly responsible for this situation.
A2.4 Technical assistance, training, and scholarly exchange with western countries in seedproduction and processing would bring a high return to the country's agricultural sector.
Fertilizer
A2.5 Optimal use of fertilizer depends on a number of factors, including soil structures andprices of fertilizer relative to crops. Both fertilizer use and economically optimal yields will thus varywithin a range. Consistently low fertilizer use, however, can mean that continuous cultivation willgradually mine natural reserves of soil nutrients. This situation is likely to have taken place in Moldova
42 Technical Annex 2
since 1992. Fertilizer application in 1993 is estimated to have been 10% of the level of 1989. It isimportant, therefore, to accelerate the increase in output prices to reach border levels so that producerswill have an economic interest in application of fertilizer. Improved delivery and financing of fertilizerpurchases will also be beneficial.
Pesticides
A2.6 Major problems exist in availability and quality of pesticides in Moldova. High qualitypesticides are imported from western countries, and due to high cost they normally represent only afraction of total pesticides used (usually less than 20%). In view of the environmentally dangerouspesticides produced in the FSU on which Moldova is still to a great degree dependent, the goal of thecrop protection strategy should be a speedy conversion to modern pesticides with high safety standards.
A2.7 The low quality of pesticides produced in the FSU, using in extreme cases up to 30 kg/haa.i. instead of several hundred grams per ha, as is now common in the west, explains why recent use ofchemicals has been on the order of 25,000 t per annum. It is estimated that if Moldova could get all itsannual needs in the form of state-of-the-art pesticides, the quantity could be reduced from the present25,000 tons to less than 6,000 tons. Increased competition in importation and domestic distribution ofagricultural chemicals will be important, as well as enhanced training of producers in pesticide applicationand management, including integrated pest management.
Agricultural Mechanization
A2.8 Moldova was in the past well supplied with tractors and agricultural machines. With therecent disruption in inter-republican trade and steep price increases of agricultural machines, procurementof new machines by farms slowed down considerably. However, thanks to the earlier more than adequatenumbers of machines, it is estimated that Moldovan farms can survive without major replacementsanother two years.
A2.9 The most immediate concern of farms is a critical lack of fuel and lubricants, which areestimated to be secured for 1993 only to about 30-40%. Another serious concern is a continuing lack ofspare parts, which is responsible for up to 30% of tractors and machines being out of operation.
A2. 10 Although Moldovan farms are in possession of a large fleet of tractors and equipment,a number of important machines are in short supply. Serious deficiencies exist in numbers and/or qualityof precision seeders, aggregates for multi-operation seedbed preparation, sugarbeet combines, maizecombines, grass mowers and hay presses, haylage machines, maize harvesters, pesticide sprayers, trailers,loaders, grain processing and storage equipment, milking machines, milk cooling equipment and a numberof other important pieces of machinery. Further, most machineries do not give full satisfaction to farmersin terms of performance, reliability, quality of work, maintenance and repair requirements, and cost ofoperation.
A2. 11 Another major deficiency is an almost total absence of suitable mechanization for smallerfarms. The Moldovan government took a Resolution to restructure the three domestic producers ofagricultural machines to fill this gap, but the program appears to be extremely ambitious, its economic
Annual Crop Production 43
justification is doubtful, the proposed time frame is too short, and in the mission's view it could at anyrate not be realized without massive outside technical and financial assistance.
Irrigation and Drainage
A2. 12 By 1992 irrigation has been developed on about 308,000 ha of land, and an area of about60,000 has been drained. Of the developed irrigated area about 80,000 ha is in urgent need ofrehabilitation (pumping station overhauls, major repairs of canals and other infrastructure). Another100,000 ha have been scheduled for modernization, consisting in essence of upgrading the existingsprinklers to equipment with wide working widths; a phased program ending in 2010 has been workedout for this purpose.
A2. 13 While drainage is considered as completed, Moldovan specialists believe that there is afurther potential of almost 0.5 million ha for additional irrigation development. They prepared a phasedprogram to bring a further 280,000 ha under irrigation in three different areas by the year 2010. Regularfeasibility studies for this program do not exist, although some more detailed planning work has beendone. The mission recommends that, when resources permit, a hydrological, engineering, agronomic,institutional and economic review of the subsector be undertaken in order to establish the realisticpotential for further irrigation development and assess the potential for investments.
Extension Services
A2. 14 Government's general extension service is organized by rayons (districts) and has a dualsubordination; administratively it falls under the rayon management and professionally directly under theMinistry of Agriculture and Food. This service is about 1,000 people strong and is reported to beunderfinanced and under-equipped for its function. Apart from government's general extension servicesthere are a number of specialized services financed by either agroprocessing plants (e.g.sugarbeetprocessing factories) or by commercial and service organizations (e.g.the parastatal FERTILITATEA,responsible for agrochemicals). The major weaknesses of the services appear to be that they are: (a)purely technically oriented and have little to say on farms' management and business orientation; and (b)have practically no messages for an emerging private farming sector. There is scope for strengtheningthe extension services, but this should be done in the framework of the whole agricultural informationsystem.
B. CURRENT STATUS
Crop Rotations
A2. 15 Crop rotations appear to be well developed and are based on past research work andscientific recommendations. The rotations, however, still seem to be carried out in a rather rigid fashion,probably as a survival from times of the central command system, when each kolkhoz and sovkhoz wasallocated a certain production target for each crop, and was obliged to cultivate annually a predetermined
44 Technical Annex 2
number of hectares. There clearly seems to be justification for a more flexible view of the rotations,particularly with respect to facilitating soil conservation (erosion control) measures, and possibly a widerrepresentation in the rotation of selected other economically advantageous crops.
Crop Yields
A2.16 Although Moldova had some of the highest crop yields of the FSU, agriculturalprofessionals are convinced, and the mission cannot but agree with them, that there is still plenty of roomfor improvement. Not only the research establishment but also the republic's best collective farms andstate farms have demonstrated that in many crops the realistic production potential is being realized onlyto 50-60%. This holds true not only for annual field crops but also for vegetables, fruits and grapes.
Grain Crops
A2.17 Until recently government considered that the optimal grain requirement of the countryis in the region of about 3.8 million tons, of which some 800,000 tons were destined for humanconsumption, and the remaining 3 million tons for livestock feed. The country's grain requirementsmight, however, change with adjustment/reductions of livestock numbers. In an average year grainimports accounted for about I million tons and hence governrment was, and still is, endeavoring toproduce as much grain as possible domestically. The Government's target for the mid-90s is 3.3 milliontons. In view of past performance, when a peak 3.4 million tons were produced in 1989 on an area of818,000 ha, this target looks attainable. However, in the ultimate analysis market forces should determinearea and production.
A2.18 In addition, since yields have beenrather erratic and intensification of grain MOLDOVAproduction has not been forthcoming, government Total Grain Areas ('000 ha)
officials envisage an increase of grain area to _ __ __ __ __ __875,000 ha by 1995, which is an increase ofalmost 5% over the highest grain area sown so 90- ....... ...... I..... ...*...
far, which was 837,000 ha in 1991 (Figure A2.1shows past and future estimated grain area boo .development). The rationale behind this thinking 700 .
is that: (a) the present not very productive orchardarea of about 200,000 ha should be reduced to Boo . .. .. ....... . ................... ......
150,000 ha by rejuvenation with modern varietiesbetter adapted to present market demands, and b0p9oss to" sae sI s7 lose isg s 1991 1992 1919 19 9b
plantations should be concentrated in ecologically 1993 .. d 1990 5o._ .t p.oj).ti-
most suitable areas, while keeping production at . _ _ _ 4 r _about the current level; and (b) there is presently Figure A2.1
little scope for expansion of high value crop (forexample, vegetables and fruits) production because of low quality of produce, decreased market demand,and inadequate domestic processing capacity. Until production technology and quality of fruits andvegetables improves and market demand for processed fruits and vegetables recovers, expansion of grain
Annual Crop Production 45
area appears economically advisable. Maintaining grain prices at world levels will stimulate an increasein grain area without explicit intervention from administrators.
A2.19 Winter wheat is one of the two most important grain crops in terms of economicimportance, area sown and quantities produced; it shares this place with maize, though maize productionis usually (though not always) somewhat higher due to better mean yields. A ten year mean yield forwheat (1983-1992) was 35.9 quintal/ha. (A quintal is 100 kilograms, or .1 tons). In comparison, themean yield during the same ten year period in Ukraine was 30.4 q/ha.
A2.20 Maize is of about equal importance to Moldova as wheat, though its main destination isfor the livestock industry, while wheat is more important for human consumption.
A2.21 Maize yields suffered from even greater fluctuations than wheat yields, with a highaverage national yield of 50.2 q/ha recorded in the favorable year of 1989, and a low 24.5 q/ha in thedisastrously dry year of 1992, during which the long season spring crops suffered much more from thelate summer drought than winter crops. The national average yield over the past decade was 37.8 q/ha,while during the same time it was 33.0 q/ha in Ukraine.
A2.22 Sorghum is moredrought tolerant than maize and MOLDOVAwould seem suitable to the Moldovan Share of Grain Production by Crop
agroclimate. In earlier days, thiscrop was grown on about 40,000 habut yields are reported to have beenvery low.
A2.23 The mission believesthat there is a potential for sorghum Others
cultivation, particularly in the drier xriain legumes
and warmer southern part of the Maize rley 143
country. Varieties are available with 1120 87
a growing period of 100 days or less, barleyand a total crop water requirement of 288
less the 4,000 m3. Researchers should Thousands tons
continue variety screening of droughttolerant, short season cultivars forboth grain and green mass Average (1QS-1092)
production. Figure A2.2
A2.24 Grain legumes are avaluable source of vegetable protein for human as well as animal consumption, and they are an excellentsoil fertility enhancing crop. In Moldova, they usually comprise only about 4.6% of arable area, and thegovernment projects little change even by 1995, perhaps underestimating the possible impact of marketforces. Over 80% of legume area is cultivated with Deas, as a result of expansion in area under peas inthe 1980s in a campaign to increase protein in feed rations. Mean yield is 20 q/ha (with extremes of 11and 31 q/ha); by comparison the 1987-89 mean yield in Hungary was 24.5 q/ha, in Romania 26.5 q/ha,in France 45.1 q/ha and in Austria 54.3 q/ha. These figures suggest that western countries have
46 Technical Annex 2
substantially better genetic material and production technology, and that Moldovan research and extensionhas some way to go to reduce the gap. Vetches. luDines and lentils are grown only to a small extent; itis too warm and dry for the former two but interest in lentils, which should grow well in Moldova, seemsto be increasing.
Industrial Crops
A2.25 Under industrial crops (technical crops in Moldovan terminology) are generallyunderstood crops which require major agroprocessing after harvest. The main representatives in thisgroup are sugarbeet, sunflower and tobacco, which in 1992, occupied 5%, 8%, and 2% of arable land,respectively. Sugarbeet is an important crop to Moldova and although it has not done well lately in eitherarea, yield or production, it has a good development potential. The country has adequate processingcapacity, albeit in many cases outdated, to process annually over 3 million tons of beet.
A2.26 Apart from the variability of climate, the major problem in sugarbeet production isobsolete production technology, starting with unsatisfactory seed (four local hybrids are available but theydo not measure up to western seed), and continuing with poor drilling equipment, inappropriate pestcontrol, and harvesting losses which are estimated to reach up to 30%.
A2.27 Sunflowers are one ofMoldova's "pride" crops, much as MOLDOVAhybrid maize, in which a lot of Sunflower Production, Area and Yield
genetic and other research work has 0noumaud. ha Thouands t
been carried out over the past years.About 80-90% of the hybrid seed l1o ... .......- 250
supply of the FSU came from ... .........Moldova (Figure A2.3). 1B0; -- -o
(almost the weight equivalent of Yield, relate to YE
Moldova's seed yield) at an average - Area --- Production :* Yields (q/haxlO)
oil content in the seed of 46-51 %.Baourc. KI.i.fy of Arbultu.r.
A2.29 Tobacco is the last Figure A2.3
major industrial crop of greateconomic importance to Moldova. In fact, discussions with farm managers have revealed that tobacco isby far their most lucrative crop, giving substantially better returns than all the other high value crops,such as fruits, vegetables, grapes. Moldova is producing mainly Virginia and Burley types of tobacco.Tobacco and its products comprise a considerable foreign trade component. Nevertheless, tobaccounderwent a very tumultuous development over the past decade, seeing its area, as well as production,erode from the mid 1980s to the early 1990s by about two thirds. Yields were much more consistent
Annual Crop Production 47
during the decade and showed actually an increase of about 25% by 1991, but dropped thereafter to thelowest figure of less than 15 q/ha in the dry year of 1992 (Figure A2.4).
A2.30 Hops are another high value crop for which particularly northern Moldova might havea good production potential. Hops are economically a very important crop. They are an essential rawmaterial for beer breweries, and are also used in the pharmaceutical and cosmetic industries. Since thecrop has very specific soil and climate requirements, it can be successfully grown only in very limitedareas of the world. The crop needs aunique and complex productiontechnology, and has high demands on MOLDOVAmanagement and labor. As a result Tobacco Area, Production and Yields
of the specific demands and complex 140
technology, dry cones of good hops 1 ub 140
fetch excellent prices on world IOD- 120
markets. Moldovan policy makers \and scientists would be well advised so.to inform producers of the potential .0 ., . ............ ; 80
of hops, including market prospects 60
and technology, since hops could 40 . .. . . .
serve for both import substitution and # =.1.7 1,9 14..20
export. 0
1984 I9go 1988 1990 1992A2.31 A r o m a t i c a n d Yids r to Yi
medicinal plants, such as roses, Production Yields ~q/ha)gladiolus, tulips, lavender, sage,camomile, also appear to have an Source: istry of ArIoulture
excellent development potential inMoldova. These crops have high gudemand on professional managementand labor, and are generally very lucrative. Since Moldova is blessed with conditions suitable for thishighly specialized production, export outlets should be explored.
C. MAJOR CONSTRAINTS
A2.32 Major constraints preventing a better performance of the crop production subsector areof institutional nature (prevalence of collective and state enterprise, general lack of motivation), economicnature (slow and difficult introduction of market based economy, lack of incentives), and of technical andtechnological nature. The paper concentrates here mainly on the latter problems. Major limitations tohigher productivity are to be found much more in serious deficiencies in infrastructure, technology, andupstream and downstream farm services, sometimes coupled with lax farm management, than in thequalification, expertise and experience of agricultural professionals. From the farmers' point of view,major inhibitions to better yields and production are perceived to be in the inadequate availability andquality of major inputs, and the increased relative price of inputs.
A2.33 The main problems on the input side include the:
48 Technical Annex 2
(a) unsatisfactory access to seeds and planting materials of superior genetic potential of openpollinated varieties as well as hybrids, which would be well adapted and of high quality.Although seed is generally available, genetic traits are often grossly inferior to state-of-the-art materials (Note: In contrast to the observations of agronomists from the WorldBank, Moldovan specialists contend that local seeds are of high quality. This is an areathat warrants further investigation.)
(b) inadequate availability and quality of mineral fertilizer, which apparently has reached thelowest levels in the past decade in 1992;
(c) drastic lack of advanced formulation, low application rate, rapidly biodegradable plantprotection chemicals, notably herbicides, but also fungicides and insecticides;
(d) obsolete seeding, planting, fertilizer distributing, spraying and harvesting machinescausing high losses;
(e) lack of post-harvest handling and storage capacities for agricultural produce; lack ofstorage capacities for fertilizer and chemicals; and
(f) last but certainly not least, the critical lack of spare parts, fuel and lubricants.
A2.34 In short, technology available to Moldovan farmers is outdated and often obsolete.
A2.35 Under the price structure that prevailed in 1992, some farms reported that they could notafford some of the inputs any more even had they been freely available.
D. RECOMMENDATIONS
General
A2.36 High quality seed, a reduced number of field operations with the assistance of modernchemicals and machines, optimal rates of good quality fertilizer, and appropriate machines for seeding,crop protection and harvesting, are essential to improvements in crop production. However, theintroduction of modern technology will greatly depend on a conducive economic environment whichwould encourage foreign investment and technical assistance, and on the future farm structure and size.The dimensions of the elements of technology, notably of farm machinery and equipment, may have tobe adjusted to smaller production units than has been the case until now. With the anticipated progressin privatization of agriculture and increase in the number of smaller farms, parameters of new technologywill have to be adjusted to those new clients as well.
A2.37 The orchard area of some 200,000 ha is grossly underexploited by low productive,overaged plantations of obsolete varieties, non-conforming to market demands. Horticulture experts inMoldova estimate that the orchard area could be reduced to some 150,000 ha. With introduction ofmodern varieties and technology the level of production could be maintained and even increased, andmore attractive produce could be offered to the market. Before reinvestment in orchards and vineyards
Annual Crop Production 49
can be undertaken, private owners who can take responsibility for borrowing will have to receive titleto these lands.
Crop Specific
A2.38 More detailed technical recommendations and considerations by crops are as follows:
(a) Through breeding work and variety screening of high yielding varieties of wheat and barlev,developed either in Moldova, Ukraine, or under similar agro-ecological conditions elsewhere,introduce genetic material with higher yield potential, to at least reach mean yields of 42 q/ha forwheat (already achieved in 1989), and 38 q/ha for barley (already achieved in 1990).
(b) Maize hybrids are being sown on 100% of cultivated area, but mean yields are low for hybridmaterial. Introduction of genetic traits into hybrid parents is recommended, similar to thosedeveloped and demonstrated in Ukraine by foremost western seed producers; further, to improveseed dressing and calibration in the seed processing plants. The aim should be to achieve at leasta sustainable mean yield of 45 q/ha (more than 50 q/ha were harvested in 1989).
(c) It is also recommended to do more research and adaptation work with dwarf, short season, highyielding sorghum varieties, which yield around 40-50 q/ha under somewhat comparableconditions in the mid-west of the US.
(d) In grain legumes, it is recommended to continue intensive variety screening supplemented by ownbreeding work, since Moldovan yields are only about 40% of those achieved in advanced westerncountries. It is also recommended to diversify from peas, currently comprising over 80% ofpulses, into high yielding, drought resistant varieties of beans and lentils. (Note: Moldovanspecialists doubt that beans and lentils will yield well. This point merits further investigation.)
(e) In soybeans, the presently available varieties appear to be badly adapted to prevailing agro-climatological conditions. It is recommended to intensify variety screening work, mainly withgenetic material from drier areas in Canada and the US, and to identify short season, droughttolerant, cold and disease resistant varieties with photoperiodicity adjusted to long days, whichcould be quickly adapted to Moldovan conditions.
(f) A possible scenario for sugarbeet production would be to achieve, on the area of 80,000 ha, asustainable production of around 3 million t of beets.
(g) In sunflower production, even more intensive variety screening, genetic work and hybrid seedproduction, coupled with the remaining elements of modern technology, are preconditions forbetter productivity. Moldova, with its excellent scientists working on sunflowers and thefavorable growing conditions, should be aiming for a sustainable mean yield of at least 22 q/ha,which is quite realistic considering that in recent years the national average yield exceeded 21q/ha.
(h) Hops appears to be a new crop with good potential.
50 Technical Annex 2
(i) Aromatic and medicinal plants are another group of special crops that can be successfullyproduced in Moldova. There appears to be good potential for expansion of these crops, but anyfurther production increase should be guided by medium and long term market demands.
TECHNICAL ANNEX 3
LIVESTOCK SECTOR
A. CURRENT SECTOR STATUS
A3. 1 Until the 1960's, livestock production in Moldova was concentrated in the collective andstate farms, with some production, mainly for home consumption, in the households. In the earlyseventies, the government initiated a program to build large scale units for the production of pork andbeef. These production units, built in nearly each rayon, were to be supplied with fodder and feed grainsby the surrounding state and collective farms. The feed base in the country, however, was insufficientto provide these complexes with feed, and Moldova imported between 1 and 1.5 million tons of feedgrain from other parts of the FSU to meet rising demand for feedgrain. With the breakup of the FSU,imports of feed became more expensive and the external market for animal products contracted. Since1991 the Moldovan livestock industry has faced a sudden rise in costs (for fuel, feed, andpharmaceuticals) and drop in demand.
A3.2 The adjustment in the livestock industry since 1991 has been partly spontaneous and partlyadministered (Figure A3.1). Collective and state farms transferred animals from the collective herds tothe household sector, and livestock complexes reduced herd size. The government has introduced anumber of measures particularly for the livestock sector, for example, the 1993-94 Program to Alleviatethe Crisis in the Livestock Sector (September, 1993), including feed subsidies, subsidized credit,accelerated transfer of social service obligations from livestock complexes to municipal budgets, andadditional financialsupport for dairyfarms with herds inexcess of 500 cows. Out hi nion rubis (M pulos)In addition, a 4000specified list of largescale complexes wasassured priority _00 __
allocation of feed 17from state sources. L1
A3.3 Pork esproduction has been l1owgranted priority over *Inpoultry and dairy inallocation of feed. A 1000significant part of thepork and poultryproduction is carried 0out in large scale f All e upuo LW&WWMproduction systems(complexes). Thesecomplexescompletely Figure A3.1 Changes in output of agriculture and speciffcally the livestock sector, 1986-191.d e p e n d o n Source: Min. of Agriculture
52 Technical Annex 3
manufactured feed and are as such vulnerable to feed shortage. They are capital intensive and appear tobe inefficient in use of labor, equipment, physical plant, and energy. The overall quality of thetechnology is lower than needed under current more competitive conditions. The complexes have amanure/waste disposal problem. They produce a pork higher in fat than is demanded on world markets,and compete mainly in the markets of the former Soviet Union.
A3.4 Feed. The major feed supplies for the livestock sector consist of forage (mainly lucerne,corn-silage, fodder beets and grasses) for ruminants and feed grain for swine and poultry.
A3.5 Most of the 370,000 ha of pasture land is used for communal grazing (around villages,in woods etc.). This land is mainly grazed or cut by hand for own use. The management and controlof the shared-use land has increasingly shifted to the village, depending on the division of authoritybetween the mayor (to become elected in 1993) and the leaders of the collective and state farms. Atpresent, communal land is not well managed; the increasing number of privately owned animals exertsconsiderable pressure on these lands.
A3.6 The feed shortages are complicated by the poor quality of the feed ration, especially theunderfeeding of protein and mineral/vitamin supplements. The lack of a balanced diet forces animals tocompensate by a higher intake of grain, leading to poor feed conversion rates. The feed conversion inthe intensive swine industry in 1993 was approximately 4.5-6 kg feed for kg growth, compared to 3 kgin western Europe; conversions in the poultry industry, which should be below 2 kg feed/kg gain, arebetween 2.5 and 3.5. The main reason for low feed efficiency is poorly balanced rations.
A3.7 Feed milling. The present feed mill capacity in the country is between 2.5 and 3 milliontons:
-Inter-enterprise feed mills: 0 .8 million tons,-Cereale: 1.5 million tons,-Small (on farms) mills: 0.4 million tons.
Capacity utilization in feed milling was 90% as of 1989 but has declined to less than 30% by 1993.Recently some of the feed mills have been modernized (including Chisinau, Floresti, Bender, Yargara,Falesti). Present capacity for palette feed is 200,000 tons (most of it for poultry). The quality ofproduction is below standards used in the West, and plants are not energy-efficient.
A3.8 Dairy Production. The average yield per cow in Moldova was among the highest in theFSU, the result of a fairly sound fodder base and the rapid change in genetics from Russian Red toHolstein cattle. The overall average yield in 1989 was over 4000 kilograms per year but declined in 1993to less than 3000 kilograms, and has continued to decline in 1994.
A3.9 Dairy processing. Nearly all milk is processed in 20 state owned dairy plants. The sizeof the plants varies between 25 tons/shift to 350 tons/shift. The major products are fresh milk, butterand cheese. The major export products are butter (90% of export of dairy products) and some skimmedmilk powder. In 1992 the main exports were to Turkmenistan (for cash), Russia (for fuel) andAzerbaijan (for fuel).
A3. 10 The quality of the processing varies considerably. Major problems are (a) outdatedmilking machines (in many farms still the bucket type), (b) poor quality milking machines (poor qualityrubber parts, for example, lead to strained milking and the subsequent risk of mastitis), (c) long milk
Livestock Sector 53
lines which are difficult to clean (d) poor control of vacuum (again with the risk of mastitis); (e) poormilk cooling on the farm with the risk of more rapid deterioration of the milk quality. The poor coolingalso requires frequent pick-up of milk in summer; a costly venture with increasing energy prices. Qualitycontrol, implemented by the processing factory and in part carried out by the milk transporters, usesoutdated test systems and methodologies. Testing for antibiotic residues is uncommon, for example.
A3.11 Beef. Similarly to other FSU countries, beef production is basically a by-product of thedairy industry which supplies the young (male) animals for fattening. Beef breeds are virtually unknown.
A3.12 Pig. Swine production is concentrated in 38 complexes which house between 18,000 and36,000 pigs. In addition pork production takes place on state and collective farms, and in the householdsector. The average daily gain in the public sector farms declined from 433 gr./day in 1985 to 262gr./day in 1991, a reflection of the decreased quantity and quality of the feed provided to the animals,especially the shortage of protein and quality minerals/vitamins.
A3.13 Meat. Approximately40% of all meat is procured by the Table A3.1: Production of Major Livestock Productsstate, and slaughtered in 12 industrial (Meat and Milk in 1,000 tons; eggs in million)abattoirs; the rest is butchered insmaller slaughterhouses or by Product 1989 1990 1991 1992 1993households. In 1990 the government Dairy products 1242.9 1267.1 1228.7 1135.0 906.3initiated a program to build some Meat** 380.8 393.3 433.1 334.4 256.3smaller abattoirs (10 tons per day Eggs 871.4 827.3 1060.9 812.5 569.7with deep freeze storage facilities) inrural areas. The quality of both the * = Dairy products in milk equivalent.old and new abattoirs is mediocre. ** = live weightFundamental changes in design of Source: Ministry of Agriculture
plants as well as equipment would beneeded for Moldovan abattoirs tocomply with EU or US sanitary regulations. As they were planned before 1990, the energy efficiencyis low.
A3.14 Poultry. Poultry production is concentrated in 38 poultry complexes, of which 14 arebreeding farms and nine are incubation stations. The poultry industry has been hit hard by the lack offeed associated with economic adjustment, and rupture of trading links in the FSU as well as with thedrought of 1992. Broiler production has contracted steeply. The production in 1992 was 19.1 thousandtons, compared to 65.8 thousand tons in 1988.
A3.15 Animal Health. The animal health situation appears poor. Calculations of mortality rates(based on government data) show a high mortality especially among pigs. The mortality is especiallyhigh among young animals; in cattle, for example, calves contribute 80-90% to the mortality rate.
A3.16 Veterinary services are provided by the state, by the veterinarians and veterinarytechnicians employed by state and collective farms, and by individuals licensed to provide veterinaryservices. Most drugs and vaccines are imported from the FSU only a small volume of feed antibioticsand medicine are manufactured locally.
54 Technical Annex 3
A3. 17 The state veterinary services in the rayon (as well as in some larger cities) also employspecialists in epizootic diseases, chemotherapy, sanitation, animal breeding as well as some generalservice veterinarians and a number who work in the rayon level diagnostic laboratory. The state servicein the city of Chisinau, for example, employs 23 veterinarians, eight veterinary technicians and 13laboratory assistants. The Director reports that there is a shortage of 700 veterinarians. This is basedon a guideline on the number of livestock unit per veterinarian; at present the number appears to be 850head of cattle equivalent per veterinarian, which seems high.
A3.18 No plans have been made regarding privatization of state veterinary services, apart fromthe introduction of payment, by farms and private owners, for drugs used the treatment of animals.Vaccinations are still provided free of charge. Several firms engaged in distribution of veterinary supplieshave been commercialized in preparation for privatization.
B. RECOMMENDATIONS
A3. 19 The livestock sector in Moldova is still in transition and is likely to require furtheradjustment. The size of the adjustment will depend on the development of internal and external markets.In the short term it depends on the feed base for livestock in the country. Present feed production(assuming a better utilization of industrial by-products) is just sufficient to satisfy domestic consumptionof livestock products, but not for excess production for an export market. Moldova is located betweentwo potential feed grain producers and this should have good access to additional feed and fodder.However, to compete on the international market Moldova's production system must prove competitivewith its neighbors. Whether this is indeed the case is by no means clear as availability of additional feedsources (industrial by-products such as sugar beet pulp, fruit pulp, bran and bone/meat meal) is limited,and minerals/vitamins have to be imported.
A3.20 The droughts of 1992 and 1994 clearly show the vulnerability of the current livestockproduction system, and the lessons learned from this experience should be carefully analyzed. It shouldlead to a reassessment of the objectives of the production system, which should concentrate in the shortrun on the domestic market. In this respect, realistic estimates of per capita demand should be made,and may be in the range of 35-40 kg per capita for meat (not much different from current consumption),10 kg fish and 300 kg milk. Such a consumption level can in normal years be satisfied by localproduction. With increased efficiency, local production may well exceed domestic use.
A3.21 Under present intensive agricultural land use most livestock production (except in thesouth) is likely to be based on permanently housed animals. Such a system is expensive and requires highproductivity and careful management. Improved productivity will require better availability of qualityfeed supplements such as minerals and vitamins, quality vaccines and animal drugs, better ventilatedhousing, better milking equipment etc.
A3.22 The country's livestock industry seems too small to support industries such as feedadditive production, milking equipment, animal drugs and vaccines. In the short term, the country willdepend on international markets for the supply of these inputs. The continued economic viability of thelivestock sector, like the crop sector, will depend on producers' ability to access international marketsfor critical inputs. A stable currency and liberal trading regime are crucial.
Livestock Sector 55
Short Term
A3.23 The short term agenda of the government should concentrate on facilitating contractionof the portion of the livestock industry that is no longer economically viable, and improving input supply,service, and marketing for the restructured remaining industry. The cessation of preferential credit willnecessitate liquidation procedures for enterprises that cannot continue to operate. Livestock complexesthat remain in operation should be privatized.
A3.24 Measures needed to improve animal health should be maintained on a basis of partial costrecovery until a program of public and private services in animal health is designed.
A3.25 The privatization (or leasing) of feed mills should continue. Those owned by Cerealeshould be included in the restructuring and privatization program for the large parastatals to be designedin 1994.
A3.26 The privatization of certain services can be planned irrespective of the outcome of farmprivatization. Included in this process should be:
a. Planning for the privatization of clinical veterinary services, including the privatizationof sale and distribution of animal drugs, vaccines and equipment;
b. Planning for the privatization of breeding service and sales and distribution of semen;
c. Planning for the privatization of farm services such as repair and servicing of milkingequipment, of farm buildings and equipment. There is a need for small multi-purposestores/repair shops at the village level which can be met in part by major changes in theconsumer cooperative system, scale of assets and stores, including removal of margincontrols and increased member representation in management. Additional retail servicescan be provided by privatization of state stores and transport.
Information/Extension/Education
A3.27 Rapidly changing conditions in which the livestock sector functions require rapid adoptionof new technologies and policies. The most urgent action of the government is to assure disseminationof information to the rural population. This information includes plans and ideas regarding privatization,new production technologies, proper environmental technologies, farm management, and national andinternational prices.
A3.28 It is equally urgent to update, modernize and improve the education of the future cadreof the livestock sector. In the short term improvement should be made by provision of literature,videotapes, and computer programs to the faculties of animal science and veterinary medicine, supportingvisits and training in other countries. Revision of curriculum, particularly introduction of managementcourses along with technical courses, should undertaken.
56 Technical Annex 3
Technical Adjustment
A3.29 With respect to production, improvement in productivity can be achieved by:
a. Proper balancing of the feed diet. Most diets (whether cattle, pigs or poultry) aresomewhat deficient in protein and often severely deficient in minerals and vitamins. Highpriority should be given to the adequate provision of feed supplements, as this can leadto major savings in grain and other feed, and to better health.
b. Better quality control for vaccines and drugs. In the present financial crisis most drugsand vaccines are procured at the lowest price. Quality is not always acceptable and cancause considerable waste.
c. Improving ventilation in animal housing.
d. Improving the on-farm quality of the milking process and equipment through the use ofbetter-quality rubber parts, frequent control of vacuum, reducing the length of vacuumlines, improving design of milk lines to allow easy cleaning, and improving cooled milkstorage on the farm.
TECHNICAL ANNEX 4
VINI-VITICULTURE
A. GRAPE PRODUCTION
A4.1 One seventh of Moldova's cultivated land is planted to vineyards. Vineyards covered amaximum area of 256.4 thousand hectares in 1976, but in recent years area has varied between 170-180thousand hectares. Moldova has a continental climate, dry and cold in winter with temperatures rangingfrom -2.5° C to -5° C, and warm in summer, with average temperatures of 17.50C to 220C, andoccasionally reaching the 300C. The average rainfall is about 420 mm. This level of precipitation issomewhat low for viticulture. The climate of Moldova also has some negative elements. The countrysuffers from periodic hard frosts which damage vineyards locally approximately every ten years. Thereare also occasional heavy rains which create problems of rot, again locally. Vineyards have a relativelyshort expected life span of between 15 and 20 years.
A4.2 The climatic conditions of the central region are favorable to the growing of grapes andto the production of white table wines and basic wines for sparkling wines. In the warmer southernregion, the climatic conditions are very favorable to the growing of black grapes and grapes for liqueurwines. The White varieties include: Pinot, Chardonnay, Traminer, Aligote, Riesling, Sylvaner, MuscatOtonel, Sauvignon Blanc, Fetiaska, Rkatziteli, Victoria. The black grape varieties are: CabernetSauvignon, Merlot, Malbec, Pinot Noir Hybrids, Saperavi, Lidia, Isabella, Gamay Freo, Bastardo deMagaratch.
A4.3 The areas planted with sparkling grape varieties (Pinot, Chardonnay, Riesling of Rhine,Aligote, Cabernet Sauvignon, Traminer) cover approximately 60,000 hectares. This represents 46% ofall the wine grape varieties, indicating that there are sufficient raw materials for the production ofsparkling wines. Table grape varieties (that is, not for production of wine) are; Cardinal, Muscat ofHamburg, and the local variety, Moldova, as well as Saba Jewel, Irshan Oliver, Queen, Amber Muscat,Early Magaracha, and White Shasla. Moldovan growers began to grow European varieties (mainlyCabernet Sauvignon, Merlot, Malbec) about 35-40 years ago. The proportion of imported vines as ashare of domestic planting has always been small. The National Institute of Research in Viticulturecertifies domestically produced root stock as virus free.
A4.4 The plantation density is about 2200 to 2700 grape vines per hectare. In general,vineyards are grown on trellising with four wires of galvanized iron and posts made of concrete. Theplanting dates are March - April. Planting of new vines takes place three to five years after old vinesare uprooted. The soil receives up to sixty tons of organic fertilizers, and a normative does of mineralfertilizer is alsu recommended.
A4.5 Plant protection agents are imported and distributed by Fertilitatea, or in some cases, bywineries for their growers. Much of the equipment used in grape production is produced domestically,although imports are also important, particularly sprayers for application of pesticides. Equipmentcurrently used in grape production was designed for operations of 1,000 to 3,000 hectares.
A4.6 Vineyards are included in the land reform and farm restructuring. In the determinationof "equivalent shares", vineyards and crop land are made equivalent through a conversion coefficient.
58 Technical Annex 4
Although the vineyards could in principle be managed either as small scale units or as large traditionalunits, little change in the traditional pattern is yet observable.
B. WINE PRODUCTION
A4.7 Moldovan wine production can be divided into the following categories:
Basic wines for sparkling wines and brandy bottled in part in Moldova, but for the mostpart in the other FSU Republics;
Fortified wines; and
Dry wines divided in two types:
-- dry wines of quality-- ordinary dry wines.
A4.8 Moldova has 150 wine-making enterprises. There are nine plants for wine bottling inMoldova, and 14 in cities of other FSU countries that traditionally bottled Moldovan wine. There arethree plants for the production of brandy (Beltsy, Tiraspol, Kishinev) and two plants (Krikov andMoldvinchampagnecombinat) for the production of sparkling wines.
A4.9 The annual wine production of Moldova is 3 to 4 million hectoliters, including 11 millionbottles of sparkling wines, 300,000 to 400,000 hectoliters of table dry wines, and 150,000 hectoliters ofbrandy. All the wineries produce the same types of wines, and most wineries were built approximately30 years ago on the same design.
A4. 10 The main characteristic of Moldovan wineries is their large production capacity. Mosthave the capacity for 10,000 tons per season, with the exception of four plants with capacity for 40,000tons of grapes per season.
A4.11 Most of Moldova's wineries will be privatized in the 1993-94 program. The winerieswhich are not on the list to be privatized are those producing brandy such as the Beltsi, Aroma andTiraspol plants, and those producing sparkling wines such as Krikova and Combinat Champagne MoldovaKishinev.
A4.12 Traditionally the Ministry of Agriculture and Food or agents of the government suppliedinputs through the system of distribution of material supply. However, due to the lack of foreigncurrency, this source of supply is now insufficient for the wineries. Some of the wineries go directly toneighboring countries for their purchases of inputs.
A4.13 Heavy equipment such as presses, vats, destemmers and drainers are in bad repair. Muchof the equipment is old and fully depreciated, and replacement will require large investments. Due tothe lack of grapes, fixed equipment is used at only partial capacity. The decline in production makes iteconomically advisable to retire rather than repair old equipment.
Vini-Viticulture 59
A4. 14 Due to the lack of credit and foreign currency, wineries cannot obtain sufficient suppliesfor bottles, corks, bottle caps, chemical products, and other inputs. In order to retain funds necessaryto run the winery, they typically delay payment for the grapes. Thus the producers are used as bankersproviding loans at negative real interest rates.
C. WINE MARKETING
A4. 15 In recent years 66% of the production was sold to the Government, which sold to otherFSU countries and to state stores in Moldova. Ten percent of the wine production was generally givenin bottles to the grape producers. The remaining 24% was sold by the winery on the local market andfor export. DACIA FENIX is the marketing office of the Government. DACIA FENIX centralizes allthe marketing operations and the creation of labels (which are often made outside Moldova, in Hungaryfor example) and advertising.
A4.16 In order to direct production towards export, which requires products of recognizedinternational quality (stabilized wines with no bacteria problem), a Moldovan laboratory must be certifiedand internationally recognized to provide reliable analysis and guarantee officially the quality of thefinished products.
A4. 17 Most Moldovan wines tasted during the mission were of average quality, and some weregood, especially red wines (Cabernet, Merlot, Malbec). Because of the presence of skilled people, goodsoils and favorable climate, the quality of wine can be improved with better grapes and better wine-making methods.
A4.18 The international market appreciates varietal wines, especially Cabernet Sauvignon,Merlot, Traminer, Riesling. These wines must be aromatic, cool, well balanced and without any physico-chemical problems. Packaging must conform to international standards: standard bottles of 0.75 liters,corks, caps of aluminum complex, conforming labels and back-labels, and cartons for 12 bottles.
A4. 19 The present packaging of Moldovan wine is typically: bottles of 0.70 liters, plastic corks,plastic caps, and non standard labels.
A4.20 The world market for wines has grown very competitive with the entry of a number ofnew players. Since Moldovan wines are not well known in the West, it is necessary to invest inmarketing. Increased export will require consistently good filtration. At present filtration presentsproblems with some wines, although there are also wines with excellent quality characteristics producedfor the domestic market and for export.
D. DOMESTIC MANUFACTURING OF EQUIPMENT
A4.21 From the grape hopper to the bottling line, much equipment is from Russia, but Moldovaalso produces wine making equipment. Moldova manufactures vertical presses (type VPG 30) forsparkling wine and also track-laying tractors for the vineyards.
A4.22 As new equipment is considered, it would be desirable to reduce the scale of equipment
60 Technical Annex 4
from the current 20 ton capacity per hour to approximately three to five tons per hour. This wouldfacilitate quality control.
E. STRATEGY FOR THE FUTURE
A4.23 In order to use valuable land to best advantage, grape yields should be increased. Whennew vines are planted, they should be of varieties certified virus free.
A4.24 With investment in packaging and bottling, Moldovan wines will be easier to market inthe FSU and in hard currency markets. Privatization early in the 1993-94 program is the single mostimportant development that can attract investment. A domestic capability to produce acceptable bottles,including champagne bottles, will be important. With improved capacity to package a product accordingto specifications of export markets, improved quality control of the wine itself will be important.Improvements are needed in pressing, processing the musts before fermentation, fermentation, and inoperations after fermentation.
A4.25 The current time period for ageing, (two or three years), is too long and should beshortened. White wines should be aged for a maximum period of 6 to 8 months in order to keep theiraromatic potential, coolness and color. Red wines should be aged for 12 to 18 months to keep theirstructure, body, bouquet and power. The reduction of the ageing period would allow sales of severalyear's vintages that have been kept too long in vats or casks. This would bring the wineries badly neededrevenues.
A4.26 The Moldovan Government should accelerate the designation of supervised originappellations. Production areas can be delimited according to soil and climate.
TECHNICAL ANNEX 5
THE PROCESSING INDUSTRY: FRUITS AND VEGETABLES
A. PRODUCTION AND PROCESSING
A5.1 The processing industry of Moldova relies on raw products from Moldovan farms. Whilethe area devoted to vegetable production has remained fairly constant, and perhaps declined a little, thearea devoted to the production of irrigated vegetables has declined substantially. Irrigated vegetables in1980 represented 70% of area devoted to vegetables, and only 55% in 1990. Yields from irrigated areasaverage only about 20% more than from non-irrigated areas, so the marginal returns to irrigation maynot be profitable, except in years of severe drought. Irrigation should increase yields and improvetenderness and quality. The relatively low yields of irrigated vegetables raise questions about utilizationof irrigated area.
A5.2 Available statistics suggest that irrigation appears to be of doubtful value for fruitproduction. Again, the yield for irrigated orchards does not exceed nonirrigated orchards by much.These statistics suggest that factors other than soil moisture may be restricting yields of fruits.
A5.3 The area devoted to production of fruits and berries has steadily increased during theyears 1983-92. Yields show variability, and average 12.5 tons per hectare, but have varied about 30%around the average. In 1991 and 1992, yields declined to very low levels of 6.8 and 4.6 tons per hectare.At these yields, orchards were probably not profitable, and canneries suffered serious losses due to lowvolume and high fixed costs. Annual variations in farm output for vegetables and tree fruits has animpact on the volume and profitability of the canning industry.
A5.4 Vegetable production has substantially exceeded domestic consumption in recent yearsby about 150%. Fruit production has been four to five times domestic consumption in recent years.Processed fruits and vegetables are thus an important export industry.
A5.5 There are 23 major operating state-owned canneries in Moldova. The 23 canneriesprocess in excess of one million tons of agricultural products, of which vegetables comprise 630,000 tons.Of this quantity, tomatoes represent 535,000 tons. Fruits comprise 410,000 tons, of which apples are330,000 tons, stone fruits are 70,000 tons and other fruits and berries are 10,000 tons. Twenty of the23 canneries manufacture tomato paste. Three canneries purchase between 50,000 to 90,000 tons of freshtomatoes for processing. These are large by international comparison in terms of volume. Firms in thenext category, (30,000 to 49,000 tons of fresh tomatoes) might be considered marginal for tomato pasteplants by world standards, but large in terms of whole and crushed tomatoes.
A5.6 Tomato paste is a commodity with world-wide standards of quality. The technology forproducing tomato paste is fairly standardized throughout the world, and many developing countriesconsider this commodity a means to enter international trade. The tomato paste market is thus highlycompetitive and entry is difficult. There may be a profitable opportunities for smaller companies to canwhole and chopped tomatoes, and to investigate opportunities to can peeled whole tomatoes. Presently,it appears that whole tomatoes are processed with peel intact.
A5.7 Twenty one of the 23 tomato canneries make tomato juice. The largest are Grigoriopol,Anenii Noi, Varnitsa and May 1 (Tiraspol). They are in the size category of five to eight million
62 Technical Annex 5
conditional cans. This range is from 937,500 to 1,500,000 U.S. gallons of single strength tomato juice.
A5.8 Apples are the main fruit processed in Moldova, and are processed in a variety of forms.Twenty two of the 23 canneries process one or more apple products. Concentrated apple juice is a majorproduct and is made at nine canneries.
A5.9 There is a fairly high degree of concentration of output among the canneries. May 1(Tiraspol), Varnitsa (Benderi) and Crasnoje are the three largest canneries measured by size of output.Measured in terms of fresh product utilized, Crasnoje and May 1 (Tiraspol) are the largest, with Varnitsadropping to the small category. The three largest processors of apple products are at Orhei, Ungheni,and Cupchina. Thus six large plants account for a large part of industry output. For both fruits andvegetables there is a large number of small companies. Visits to plants of various sizes did not show anyone size to have more modern processing techniques or equipment, buildings, or better product flowthrough the factories. In fact, one factory with the most modern (1988) concentrating equipment provideda very clear apple juice with a metallic flavor (from the can). Modern processing equipment does notguarantee the best finished product, but it may make it possible, if other factors are satisfactory.
A5. 10 The number of full-time workers in Moldovan canneries is very high in proportion toseasonal workers, especially when one considers canning to be a seasonal economic activity. For the fivecanneries visited, seasonal workers represent only 30% of the total peak work force, and permanentworkers represent 70%. This is about the reverse in most seasonal canneries in the U.S. As privatizationoccurs, increasingly competitive canning enterprises will have to reduce the retention of redundant laboroff season.
A5. 11 The plants visited are labor intensive. Jars and cans are stacked by hand, labels areinstalled individually by hand and many lines are approximately 50% mechanized. Product flows throughthe canneries are not always logical. Machinery is old, and much is technologically outdated. Electricmotors are not energy efficient. Floors are not even or of consistent construction, so that clean-up mustbe very difficult. A number of conditions were observed in each plant visited that would violate safetyregulations in most western countries. The canneries are not regulated or inspected for safety conditions.Finished product quality is checked by the state laboratory operated by the Department of Fruit andVegetable Growing and Processing of the Ministry of Agriculture and Food.
A5. 12 Moldovan canneries visited normally operate between 40 to 65 % of capacity. Aminimum of 65% prevails for most diversified canners in the U.S. Those operating at low levels ofcapacity have high fixed costs which make them non-competitive.
A5.13 Moldova engages in substantial export trade with its fruit and vegetable products, andwithin the former USSR, has enjoyed a good reputation as a supplier of these commodities. In additionto export of canned products, Moldova has traditionally exported processed fruits and vegetables in bulk.For example, in 1991 the value of exports of juices and extracts was almost 100 million rubles, comparedto a value of canned tomato exports of 117 million rubles. The value of canned fruit products in 1991was three times that of bulk concentrate juices. Bulk juices, however, have traditionally been betterestablished on hard currency export markets. Two-thirds of bulk juice exports in 1991 went to Austriaand Germany (see statistical appendix). Russia was the main customer for canned vegetables, tomatoes,and fruit in 1991. It accounted for 58, 35, and 72%, respectively, for canned product exports.
The Processing Industry. Fruits and Vegetables 63
A5. 14 According to current procedures of the privatization program, 50% of shares will bedistributed to past suppliers of raw materials; 20% to workers and 30% to the general public againstvouchers. If groups do not subscribe to their shares, these can be sold at public auction. This programwill be implemented in 1994.
A5.15 Under existing legislation it is possible, but very difficult, for a private foreign enterpriseto become licensed in Moldova. A joint venture expecting to sell part of its output in Moldova must belicensed. A joint venture where the foreign partner sells its products to outside markets does not requirea license from the Ministry of Agriculture and Food, but will require authorization from other agencies.
A5. 16 Under existing legislation, a canning enterprise cannot be purchased solely by its suppliersto be owned by the farmers and operated as a western-style cooperative, although under the privatizationprogram suppliers could in theory acquire 70% of shares. However, a group of farmers able to capitalizea new enterprise could organize a cooperative to process and market their farm products.
Priorities for the Canning Industry
A5. 17 There seems to be common understanding of governmental and industry priorities for thedevelopment of the fruit and vegetable canning industry. Priorities are based on the fact that Moldovahas the capability to produce canned and processed fruits and vegetables in excess of its domestic needs,and has developed a strong market reputation within the former USSR. Although Moldovan productsare well known and highly regarded throughout the former Soviet Union, Moldovan exporters will haveto pay careful attention to pricing and quality in order to retain this market.
A5.18 In order to improve the quality of final products there will be a need for new equipment,including production lines and packaging equipment, to raise quality, retain existing markets, and expandgeographically. In order better to meet consumer needs, container sizes will have to be reduced. Achange in the concept of producing for volume to producing for specific consumer preferences will alsoneed to be established. Consumers want more information on nutrition, and products with highernutritive content.
A5. 19 The use of re-sealable twist lids for glass jars will improve product quality in homes aftercontainers are opened. Use of tetra brik cartons could improve product life, and reduce costs due to lessbreakage and lower container weight, but tetra brik technology is not now in use and its economicadvantage has not been rigorously evaluated. The use of plastic tubs for jams and jellies could reducepackaging costs.
A5.20 These general objectives appear reasonable and should prove of value for the industry'sgrowth. Specific measures must be subjected to rigorous cost/benefit analysis. Privatization of foodprocessing must be accelerated, along with reforms in the financial sector. Once financial reform hasprogressed more and processors are privatized, loans and equity from international sources will be moreavailable for the processing industry.
A5.21 The Government and industry have developed specific proposals for investment topromote the objectives described above. Each of these proposals should be subjected to evaluation foreconomic rate of return and credit-worthiness of the borrower.
64 Technical Annex 5
a. Renovation of 6 canneries:* Kupchin (pectin manufacturing)* Soroca (fruit puree for baby food)* Causheni (concentrated fruit juices)* Ungheni (juices; packaging line ((tetra brik)) for tomato paste)* Calarash (juices)* Anenii Noi (renovation of processing lines and equipment, tetra brik packaging)
b. Development of citric acid manufacturing capabilities from beet sugar wastes, mainly forexport.
c. Margarine manufacturing for domestic needs.
d. Sweeteners, such as corn sweeteners and molasses from sugar beet refining, primarilyfor export, but some potential use by the canning industry.
e. General improvement of packaging and containers used by the canning industry, such asre-sealable twist lids for glass jars, as replacement for the pry-off lids now used.
B. CONCLUSIONS
A5.22 The quality of processed fruit and vegetable products depends on several factors. Freshproducts must be delivered free of disease, rot, external blemishes, insect and mechanical injury.Factories must properly prepare and sort raw products, and cooking and cooling must be done at propertemperatures, and containers must be of acceptable quality.
A5.23 The site study for this report was made in May prior to the start of the canning season,which starts in early to mid June. Although this was the off-season, the state of disorganization in mostplants suggests the canneries will not receive complete refurbishment prior to season. Most productionlines and many cookers are old, which leads to improper controls, including cooking temperatures andtimes. Evidence of these problems comes from the appearance of canned fruits and color and tastes ofjams, preserves, and juices. Use of steel containers results in metallic tastes to juices in some plants.Storage conditions for empty jars and containers are inadequate, and often containers are exposed to theelements without protection or cover.
A5.24 Floors are uneven and concrete often cracked, so that sanitation and cleanliness may beinadequate. It is difficult to move products on such floors by fork lifts.
A5.25 Investments should be considered in terms of production lines or systems. When newsections are added, consideration should be given to new (steel) buildings, with proper re-enforced floors.
A5.26 Tomatoes are an important commodity for processing in Moldova. Some of theMoldovan plants are large enough to be internationally competitive if they produce quality products.Tomato paste is a major product from canneries in the country, but for various reasons, the quality ofthe final product does not adequately meet most western requirements. This is due mainly to moldcounts, but the quality is acceptable in markets in the FSU. Mold originates in the field, and often results
The Processing Industry: Fruits and Vegetables 65
from seasonal rains that decay the fruit. Better sorting at the harvest level can materially reduce moldson fruits delivered to the canneries, and if canneries in turn can process fruit shortly after delivery, theresulting paste will have fewer mold spores.
A5.27 Aseptic packaging can be helpful for the industry, particularly as processors shift to 200kg drum containers.
A5.28 Site inspections suggest that the industry will require a large-scale conversion to newertechnology, energy saving electric motors and boilers, and packaging equipment and supplies during thenext 10 years. If this does not occur, Moldova might easily be replaced by canners in other FSUcountries, and by countries such as Bulgaria, Romania, Hungary, and Poland.
66 Technical Annex 5
STATISTICAL ANNEX
STATISTICAL ANNEXLIST OF TABLES
1. Basic Sectoral Indicators .......... . . .. . . .. . . .. . . .. . .. . . .. . . .. . . .. . . . 69A. National Income in Current and 1983 Prices, Million Rubles, 1980-1992B. Per-capita Consumption of Basic Foods, 1975-1993C. Basic Indicators for the Agricultural Sector, 1985-1993D. Per-capita Production of Basic Agricultural Goods, 1985-1992E. Total Area, Output, and Yields for Major Crops, 1983-1992F. Main Aggregates of Animal HusbandryG. Grain Balances, 1986-1990H. Debt Held By Agro-Industrial Complexes, End of Period, in Thousand Rubles1. Land Use in Thousand HectaresJ. Land Use by Crop and Sector, Thousand Hectares, 1980-1991
II. Agricultural Prices and Marketing ........ . . . . . . . . . 81A. Fuel Prices in Rubles, 1989-1993B. Farm Machinery Supply and Prices, 1989-1993C. Producer Prices Received and Volume Sold Through Various Marketing ChannelsD. Food Prices in State Stores, 1992E. Changes in Marketing Channels, 1990-1992
III. Animal Inventories and Productivity ........ . . . . . ........... . . . . . . . . . . . . 101A. Animal Inventories, Public Sector, Beginning of Year, 1985-1993B. Animal Inventories in Public Sector Farms, End of Year, (000) by RaionC. Animal Inventories in All Farms by Raion, 1992 and 1993D. Use of Feed for Milk and Meat, All Farms, 1982-1992 (In Standard Feed Units)E. Productivity of Livestock, 1985-1991, Public Sector and All Farms
IV. Input Availability and Use ......... . . .. . . . .. . . . .. . . . . .. . . . .. . . . . .. . . 112A. Value of Agricultural Inputs Used, 1990 and 1992 (Thousand Current Rubles)B. Use of Inputs in Agriculture, QuantitiesC. Agricultural Equipment Stocks, 1985-1991D. Normative Use of Inputs in the Crop SectorE. Normative Input Use Per Ton of Output in the Livestock Sector
VI. Food Processing . ............ . . .............. 119A. Production of Major Types of Processed Food, 1985-1991
VII. International Trade . . ........... . .............. 121A. Interrepublic and Foreign Trade, 1982-1991B. Trade by Branch of Activity, Million Rubles, 1982-1991C. Exports By Item in Natural Units and Value (Thousand Rubles), 1991D. Imports By Item in Natural Units and Value (Thousand Rubles), 1991
Table I A: National Income in Current and 1983 Prices, Million Rubles, 1980-1992
Of which perennials 478.9 488.5 495.4 471.7 449.4 448.8 455.7 464.4 467.2 474.3
Of which hay 4.7 4.4 4.0 4.3 4.0 4.0 4.1 4.4 3.8 3.4
Of which pasture 280.4 281.0 282.0 286.5 287.5 289.7 299.3 335.3 341.2 340.6
Forest, thousand hectares'
Forest total 301.2 317.6
Of which public land 281.8 298.9
Cultivated forest 25.4 35.3
Of which public 24.9 34.5
Source: Ministry of Agriculture, from Zemel'nyi Kadastr and Narodnoe Khoziaistvo Respubliki Moldova 1991'Note: Forestry data are collected in inventories every five years, including January 1 1973, 1978, 1983, and 1988.
Statistics 79
Table I : Land Use by Crop and Sector, Thousand Heclares, 1980-1991
Area planted to major crops, thousand hectares 1980 J 1980 1985 1985 1990 1990 J 1991 1991
All | Public All | Public All Public All Public
Total crops 1839.3 1713.9 1789.8 1664.1 1733.1 1607.2 1717.4 1552.6
Wholesale prices per ton for public sector farms (rubles)
B76(Low-octane) | [ J - 8722 T 7850 [ 7850 | _ _ 1 _ _ _ _ i
B93(High-octane) | 1 1 1 I 15557 15557 1 15557 |
D (Diesel) _ I _ I _ I |9477 | 8055 8055 1
Statistics 81
Table 11 A: Fuel Prices in Rubles, 1989-1993, continued
1992 1993
I:uel 1989 1 91'90 1991 __ _ __ __1 _ __ _ __ _ __ _ _ __ _ __ _ __ _ __ _ __ _ _|__ __ _ _1993___ _ __ _ _Jain Feb March April May June July Aug Sept Oct Nov |Dec Jan I Fcb
Wholesale prices per liter at gas stations for all users (rubles)
Note: Feed is measured in "standard units" equivalent to a ton of oats.'Use of feed and productivity of feed in public sector onlySource: Ministry of Agriculture from Department of Statistics
Table III E: Productivity of Livestock, 1985-1992, Public Sector and All Farms