Assessing the proposed land reform in Kazakhstan

Why did Kazakhstan balk at leasing farmland to foreigners for long terms?

by Dmitriy Belyanin

In many transition economies, the government restricts farmland sales or bans them outright.  This article looks at a recent attempt to extend tenant rights in Kazakhstan.

The land reform and opposition to it

In late April, protests in Aktobe, Semey and Atyrau demonstrated the unpopularity of farm sales to foreigners.  In fact, such sales are illegal. But the President of Kazakhstan, Nursultan Nazarbayev, explained that land would not be sold to foreigners -- the new policy would simply increase the lease from 10 to 25 years.  The longer lease would enable foreigners to make a reasonable return, argued Gulzhan Karagusova, deputy of the Majilis, the lower house of Parliament. Indeed, foreigners leased only 6% of all farmland, out of which 2% was leased by Kyrgyzstanis, 2% by Uzbekistanis, and the rest mainly by Germans and Dutch, reported Lada.kz.

Kasymzhomart Tokayev, the chairman of Kazakhstan’s Senate, said the government should explain the new land code well and close loopholes that would let foreigners buy farmland, said Ruslan Bakhtigareyev of the Regnum information agency. But this did not satisfy protesters.

In the first week of May, Nazarbayev threw in the towel.  He imposed a moratorium on the new land code until 2017, and he demanded a commission that would redesign land reforms, according to Tengri News. Yerbolat Dosayev, Minister of the National Economy, resigned after the moratorium, and Asylzhan Mamytbekov, Minister of Agriculture, received a strict reprimand from the President.  He too quit at the end of the week, reported Alexander Konstantinov, of Kommersant.

On June 15, the Majilis decided that until the end of 2016, foreigners could no longer lease land.  Neither can the government privatize land to Kazakhstanis, said Tamara Vaal of the Vlast’ Internet magazine.

Options for controlling contamination

The furor over long-term farm rents to foreigners highlights Kazakhstani fears of poisoned land and unhealthy food.  There are no grounds for some of these fears: Increasing the lease strengthens incentives to avoid long-run contamination.  But consolidating small farms can create problems.  While small farmers are not likely to use lots of pesticides and chemical fertilizers, large farms might, since they act on scale economies.  In particular, Chinese manufacturers and farmers have a reputation for pollution.  Chinese farmers use 1.3 million tons of pesticides annually, which is 2.5 times the world average.  In 2014, total contaminated soil in China was estimated by the Ministry of Environmental Protection and the Ministry of Land and Natural Resources at 24.5 million hectares, about a fifth of all farmland.  Later, the Minister of Agriculture said 40% of farmland was contaminated and eroded, reported Lyan Hua of Epochtimes.ru.

Though Beijing plans to reduce pollution and soil contamination, this may be done by relocating enterprises abroad.  To diversify the economy and to replace revenue lost through plummeting oil prices, the government of Kazakhstan might cheerfully accept the chance to increase crops at the expense of quality.  Kazakhstan has sparsely populated land, and labor costs that declined in dollar terms due to tenge depreciation; so it can attract Chinese farmers, though government statistics suggest that this has not yet been the case. Though the government can inspect soil for contamination, it will have trouble enforcing regulations. After all, it’s hard to track poisons to their source.  Even if the government can, it may balk at the consequences of reducing farm supply – i.e., higher food prices.

Two more promising approaches are to restrict the supply of pesticides and fertilizers or – even better -- to tax them for pollution damages. Both approaches increase food prices, but pollution taxes force the producer to take into account the harm due to another pound of pesticides.  An example may help.  Suppose that the pound would inflict 50,000 tenge of damages, but the producer would profit by only 30,000 tenge by selling the pound.  Since the tax would exceed the profit, the producer will not sell that pound.  And that’s the right decision, because the pound’s value to society (reflected by the profit) is less than its cost (reflected by the tax).  On the other hand, if the potential profit is 60,000 tenge, the producer will sell the pound and pay the tax for a net gain of 10,000 tenge. That again is the right decision, because the benefits of the pesticide justify the little bit of pollution. Indeed, in the West, pesticides seem to be valuable, since most farmers are willing to pay high prices for them.  A 10% price hike cuts demand by only about 2% to 5%, estimated Pina and Forcada. 

Kazakhstan is not likely to adopt the pollution tax soon, largely because environmentalists think it gives producers too much leeway (although the green movement in the US is gradually warming to the idea).  However, green taxes can raise government revenues.  For example, Mexico began taxing in 2014.  It divided pesticides into five categories, depending on toxicity, and it levied pollution tax rates of 3-4.5%, half of the permanent rates, reported the Organisation for Economic Co-operation and Development (OECD).

Impact on landowners and tenants

In the short run, landowners may benefit more from the lease reform than renters would.  In most markets, demand and supply affect price and quantity.  For example, an increase in the supply of kefir drinks will lower the price, since otherwise stores can’t sell the additional drinks.  But land is an unusual commodity: It’s fixed in supply.  Changes in its price depend entirely on demand, so the price can be volatile; if demand rises, supply cannot rise and thus reduce the increase in price.  The land reform would raise demand by enabling foreigners to lease it for longer than before.  Land prices would climb, and landowners would profit.  Land rents must also rise, since otherwise landowners would sell their land rather than lease it out.  Tenants would lose.

In the long run, Kazakhstanis could gain from the reform, since it would attract from abroad more productive uses of the land. In principle, the new uses must be more productive and profitable than the old uses, since otherwise foreigners would take no interest in the land.

Wait, I’ll explain. In the long run, the price of land must equal its expected value.  After all, were the price lower than the value, buyers would bid it up because they expect to profit.  And were the price higher than the value, owners would sell the land, and their competition for buyers would lower the price. To clear the land market, the price must equal the value, leaving zero profits to the additional buyer.  But a foreign buyer could introduce a new use of the land that raises its value above its price, yielding her profit. As Kazakhstanis adapt this new use to their own plots, their economy may grow more rapidly than before.

But competition produces losers as well as winners. As a new member of the World Trade Organization, Kazakhstan must cut farm subsidies.  Small Kazakhstani farmers will risk bankruptcy -- especially if Chinese farmers, who have the technology to create cheap foods, can buy or rent land.  The bankrupt and the unemployed will migrate to cities, leaving behind sparsely populated and impoverished areas.  Some residents may join extremist groups. 

On the other hand, sales of farmland to foreigners could ensure that it remains useful, since abandoned land would eventually be sold for productive use.  Residents may find work, though not necessarily at wages higher than those that prevailed in the era of subsidies.  On one hand, yes, the new farms will raise the demand for workers and thus their pay.  But on the other hand, large new employers will dominate rural labor markets, and they will take advantage of their market power by cutting wages to the point where the additional worker is indifferent between accepting the job or turning it down. 

Economists have a special term for a labor market dominated by a single employer – a monopsony.  This market is inefficient because the employer can’t raise the wage enough to keep a productive additional worker.  Why not?  Because, in order to avoid labor disputes, he would have to raise the wage for everyone else as well. That would cost him major money.

Foreign exchange market considerations and forecasting   

Since the tenge has been weakening relative to the dollar and the yuan, the Chinese might lose money by farming here: Most of their revenues would be in tenge, and their costs in dollars and renminbi.  It’s unlikely that Chinese farmers would buy domestic inputs, since Kazakhstan does not produce enough farm equipment and seeds.  The Eurasian Union, which bought a tenth of Kazakhstan’s exports in 2015, according to Kaznext Invest, enables farmers here to sell more, but the recession in Russia impedes its imports.  Processors and retailers of Kazakhstani-made farm goods may still demand staple products, such as wheat from northern Kazakhstan; but the situation is more complicated for more sophisticated products, demand for which is more responsive to the price. 

Moreover, Kazakhstan faces competition in the CIS. Uzbekistan’s president, Islam Karimov, vows to substitute Uzbek exports for Turkish fruits and vegetables that no longer go to Russia, thanks to the Kremlin’s embargo on Turkey, reported RBC.ru.

This also puts farmers in Kazakhstan at a disadvantage. Russia would prefer to buy from Uzbekistan, in hopes that expanded trade would induce Tashkent to support Russia politically.  The European Union, which accounted for 56% of Kazakhstan’s exports in 2015, has lost income due to the Russian embargo and so will buy fewer farm exports from Central Asia.  Moreover, the withdrawal of the United Kingdom from the EU may weaken the euro, raising the euro price of imports from Kazakhstan.  

The situation will change after Russia’s economy resumes growth or after the Russian embargo on European agricultural products ends. But neither is likely to occur soon: Russian economy is still stagnating, and the geopolitical struggle is aggravating.  The Kremlin’s Turkish policy illustrates its devotion to import substitution in agriculture and its reluctance to cancel the embargo: Even though Erdogan apologized for shooting down the war plane SU-24 in November 2015, Russia is still wary, allowing Turkish tourist flights but not imports of Turkish food.  According to Dmitriy Medvedev, Prime Minister of Russia, restoring normal relations with Turkey does not imply opening borders and allowing Turkish imports immediately. Producers from other countries have taken advantage of the embargo to gain market share, and Russia will keep buying products from them, asserts Mariya Bondarenko of RBC Channel.   Russian policy toward EU imports is likely to be similar. 

Of course, Russian buyers still lose from the higher prices and the loss of diversity that stem from limits on imports.  Domestic and non-EU firms cannot produce food as efficiently as European exporters.  However, Russian propaganda argues that domestic products and imports from small neighbors are healthier than European products, since they rely less on genetically modified organisms.  In September 2015, the Russian government banned GM foods, said Reuters.  This will raise food prices, but many believe that it will improve foods.  Rural Russians support the embargo, despite their losses from European imports smuggled into Russia through Belarus and Kazakhstan. 

This does not imply that the embargo will be permanent.  But the Kremlin may keep it going for a while in hopes that Eurosceptic political parties in Europe will undermine the sanctions someday. 

In any event, land rents in Kazakhstan can’t fully offset the loss in government revenues from decreasing oil prices. One preliminary study estimates that a 25-year lease would raise net revenues that the government would receive on farmland, relative to 10-year leases, by 140%.  But oil money accounts for half of Astana’s revenues, according to Standard & Poor’s.

Experience of Russia

In Russia, plans are more explicit to rent land to the Chinese.  The government of the Zabaikalski krai, a Siberian region east of the Baikal Lake, plans to lease 115 hectares of land to a Russian company with Chinese shareholders for 49 years and then to attract Chinese laborers to cultivate the land.  A preliminary protocol was signed in June 2015.  Two hundred more hectares could be leased.  A preliminary rent of 250 rubles per hectare annually was set. 

The Chinese would hold no more than half of the jobs, since Russians fear losing their own. But in reality, the Chinese find work in Russia less attractive than employment in their own southern and eastern provinces, where salaries are higher, report Andrey Vinokurov and Elizaveta Mayetnaya of Gazeta.ru. 

According to Konstantin Ilkovskiy, governor of the region, the local government would own a fourth to a half of the enterprise and Chinese investors would hold the rest.  There are no special preferences for China, and any Russian investor may be considered.  The agreement was to be signed in the 1^st quarter of 2016, and farming would begin in May, said Interfax.

Like Kazakhstanis, Russians protested land leases.  In August 2015, in Chita, the capital of the Zabaikalski Krai, 150 thousand people, mainly supporters of the Communist Party of Russia, demanded that the government resign, reported Iliya Barinov of the TASS information agency.

The government of the Zabaikalski Krai selected the Chinese company Zoje Resources Investment as the lease-holder. But in February 2016, the firm reneged on its promise to rent, according to Flash Siberia. This leaves the government with 800 thousand unused hectares, said the Vedomosti newspaper.  For Russia as a whole, 56 million hectares of agricultural land are unused, according to Ruslan Ostashko of the Political Russia magazine. In his view, the lease of land to foreign investors is common, and people should not fear Chinese investors more than, say, Saudi or Indian investors.

Other countries offer similar cases.  The Chinese cultivate 3 million hectares of farmland in Ukraine, several hundred hectares in Tanzania, 10 thousand hectares in Cameroon (mainly for rice), 100 thousand hectares in Zimbabwe, 2.8 million hectares in Congo and 2 million hectares in Zambia.

Predictions

Fears of protests make unlikely the completion of a deal with Chinese investors in Russia and the extension of foreign leases in Kazakhstan. However, since Russia has so much land, and since BRICS must strengthen their ties, it might be easier to convince the Russians to make the deal than to persuade Kazakhstanis. But since the Kremlin appeals to health concerns of consumers, it would still have to demonstrate that food quality would not decay.  Having a less diversified economy, Kazakhstan will find it more difficult than Russia does to avoid unpopular measures to raise revenues by boosting food production. The lease may be lengthened next year anyway, depending on politics and oil prices.  Both countries may also try to attract tenants from economies with good environmental reputations.

Conclusions

Lease and sale of farm hectares can boost land use and production, but many people in transition economies oppose extending these practices to foreigners.  Though the Chinese rent lots of land in other countries, their reputation for environmentally unfriendly practices daunt Kazakhstanis and Russians.  Many fear losing their jobs to Chinese immigrants. These concerns, however groundless, led to protests that induced the governments to rethink their initiatives.  Environmental effects can be mitigated with toxicity standards or pollution taxes.  The latter policy is economically efficient, though the governments of Kazakhstan and Russia are unlikely to rely on it. 

Dmitriy Belyanin has a Master’s degree of Business Administration in Finance and a Bachelor of Arts degree in Economics from KIMEP University.  Since 2007, he has been writing on issues in economics and finance ranging from stock markets to environmental economics. He is the associate editor of this blog.

References

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