Roy Chapin's report, conclusions and comments after visiting a collective farm (now called JSC) located in the Ivanovo region 400 kilometers NE of Moscow
On Tuesday and Wednesday the 22nd and 23rd of October 1996 I had the unique opportunity to view first hand a Russian Joint Stock Company (JSC) that had been created from the privatization of a former collective farm. Privatization is the first step in converting a state or collective farm into a competitive force in Russia's developing market economy. This JSC has not yet taken the next two critical steps needed for success which are reorganization and restructuring.
What follows is a fairly detailed report on that visit with considerable editorializing (some will call it "preachy", biased and repetitious) by me conjecturing on the meaning and implications of what I observed. I think that what follows will supply the reader with a strong dose of "Russian reality" and allow him/her to draw some personal conclusions as to some possible solutions to Russia's agricultural and related social challenges. There are no easy answers.
Before we proceed, we need to understand some terms. Privatization occurs when the ownership of the farm is given to the people who work on the farm. It is then called a "Joint Stock Company" but usually nothing much has changed in the running of the new JSC as everyone theoretically owns everything (just as they were told they did before) so that in reality, no one owns anything specifically and most importantly, most don't take "ownership" interest and responsibility. They are still supposed to work collectively together to try and make it work, but in practice, they usually try to extract all that they can as soon as they can for themselves, without concern for the short or long term benefit of the JSC. Their methods of operation are not always legal.
One of the self-defeating problems of a society that is so unstable politically and economically as Russia's is that people work for the present and not for the future. Rather than investing time, talents and assets in an enterprise in the expectation of later enjoying "delayed gratification", under such an unstable situation most everyone, including managers and so called "owners", look at the enterprise as a source for the fulfilling of immediate gratification and thus they "milk it to death", dooming most economic endeavors to failure. The attitude is "how much can I get out and how soon" rather than working, investing and building for their future and for future generations.
A privatized JSC is reorganized when it is legally divided into different business entities, usually by the means of an auction. A experience reorganized JSC could have different business entities such as barbershops, bakeries, grocery stores, various specialty shops, crops and livestock divisions, etc. that are legally owned by specific people who are then responsible to manage them for a profit.
A restructured farm would be one that, after having been privatized to a JSC, had been reorganized into different business entities and had then made business management changes such as installing new managers, new processing equipment, new technology, new marketing programs, etc. These would be changes deemed necessary to compete and survive in a market economy.
Seeing the Rozhdestveno Joint Stock Company, which is located 80 kilometers NE of Ivanovo and 400 kilometers NE of Moscow, allowed me a first hand look at a truly dysfunctional former Soviet Union farming community that is quickly reaching an economic "melt down" situation, unless drastic changes are made, as Russia goes through the painful transition from a centrally planned economy to a free market economy.
I was fortunate to have this experience while serving as a volunteer animal nutritionist with Land O'Lakes (LOL) and their United States Agency for International Development (USAID) sponsored "Farmer to Farmer" (FTF) program.
During my visit to this farm many questions came to mind, including "Is this kind of human suffering necessary?" Unfortunately, it is unless drastic action is taken immediately by the "stockholders" of this and other state and collective farms, who now call themselves JSC's. They need to reorganize and to restructure. The International Finance Corporation (IFC) of the British Know-How Fund (part of the World Bank) and USAID's Market Oriented Farm Support Activity (MOFSA) are two of several Western organizations working to help Russian JSC's make the transition to true private ownership and thus to unlock the favorable economic potential to create wealth that can be realized in a market economy.
My original reason for visiting this farm was to serve as a consulting dairy nutritionist, a job that I have done extensively in the United States and during thirty plus international trips, mostly for the U. S. Feed Grains Council. On this farm it soon became obvious that advising on dairy nutrition and management would not make enough difference to save this farm and the community that depends upon the dairy from economic ruin. They know what to do nutritionally but they cannot implement the necessary changes because they are broke. There are some options available to them. They must take strong and bold steps to implement effective agribusiness management changes that would allow them to operate in an environment of private ownership if they expect to improve their standard of living.
While the individual agribusiness firms are attempting to adjust their micro-economic approach to compete in a market economy, it would help if Russia would make corresponding improvements in their macro-economic policy to help facilitate private ownership, long term investment, competition and viable markets to determine prices. The infrastructure that supports Russia's agribusiness sector needs much more development to allow private agribusiness enterprises to flourish. Specifically, Russia needs better technology, roads and communication, improved financing, a new tax code, a choice of suppliers, increased processing capabilities to add value to raw agricultural products and a choice of markets with a population that has enough money to create a demand and to pay cash for what they buy, and they need this without the Mafia, crime, excessive government rules, regulations and corruption that they now encounter that holds back economic growth throughout Russia.
Seeing this dysfunctional collective farm gave me a renewed incentive to strive to accomplish the objectives of the Russian - American Agribusiness Training Partnership (RAATP), of which I am the resident coordinator for Texas A&M University (TAMU). TAMU is the American partner. The Russian Ministry of Agriculture and Food (MAF) and their Retraining Academies and Institutions are our Russian partners. We also work with the other three branches of agricultural education, which are the teknicums, agricultural universities and the academy of agricultural sciences. The latter is involved primarily with agricultural research. Education is a big part of the answer if Russia is to succeed in the implementation of market reforms. Hopefully the Russian professors that we are training in our agribusiness management seminars will effectively transfer their newly learned technology to end users who will then be able to manage Russia's farms and agribusiness firms efficiently so as to create greater wealth after these JSC's are re-reorganized and restructured and then be allowed to operate as true private enterprises.
Retiring U.S. ambassador to Russia, Thomas Pickering, recently spoke optimistically of Russia's future. You couldn't tell it from visiting this farm unless it is first necessary for former state and collective farms and the communities that they represent to go through the human suffering and agony of bankruptcy, which will force them to make the tough decisions that will allow them to convert to truly private ownership, and thus give the owners the authority and responsibility for the results, and therefore unlock the factors of production so that the land, labor and capital of agriculture can finally be managed efficiently to produce wealth in Russia. If farm bankruptcy is the final step necessary before private ownership is implemented, with it's anticipated greater profitability and productivity, then Ambassador Pickering is right in saying that Russia is making rapid progress.
Russia's state farms are having more trouble now than they were prior to perestroika and we are thus told often by Russians that this indicates that a market economy doesn't work. This may appear to many to be a logical conclusion but it overlooks the historical fact that these state farms (in the aggregate, as there may have been individual exceptions) have never been efficient when measured by Western standards. With the loss of state subsidies (and the government's inability to pay them when the world price of oil crashed), the developing market economy makes it more obvious than ever that these farms are not efficient and that most of them cannot to be operated successfully as collective farms and be expected to be able to compete in a world market. They need to be truly privatized, reorganized and restructured and then managed with a profit objective rather than a production objective so as to realize an adequate return on the assets committed to them and to allow Russian agribusiness to feed and clothe Russians rather than relying on more efficient foreign producers.. It will be years before Russian agribusiness will be able to compete effectively with foreign producers, but they are starting to make attempts to improve their efficiency. The accomplishment of this objective is being furthered by substantial Western humanitarian aid in the form of education, training and technology.
This particular collective farm - now a JSC - is close to self-destructing and the Russian reality is that there are many former state and collective farms in similar desperate conditions. The challenge is to keep Russia fed during this transition, avoid a revolution and to minimize the human suffering that is being self-inflicted by these people upon themselves because they resist change and because they are not admitting that the old collective farm approach is "dead". It is dead because it is not competitive in comparison to foreign agribusiness that works in a market economy.
The pillars of the free enterprise system are 1. private ownership of all factors of production, including the private ownership of land, 2. competition among suppliers, producers and customers and 3. prices set in the market place with profit, rather than production, as the incentive. Russia presently needs improvement in all of these basic areas of a free enterprise system that have been proven to be essential for a market economy to work effectively to create wealth. This JSC and others can accomplish the private ownership part but the Russian government must govern so as to increase competition and to allow prices to be set freely in the market place. There are some encouraging signs that the government is beginning to make changes so as to increase competition and to encourage price determination in a free market setting.
Previously, the Soviet State supported these state and collective farms with subsidies and labor was "encouraged" to work hard because of the threat of negative personnel management (the whip approach). With the personal freedom that has come with perestroika , the whip has not been adequately replaced by personal economic incentives (the carrot approach) to keep people working hard and efficiently. Private ownership of ALL factors of production can get "greedy" people working for their own self interests and thus they will benefit society in the aggregate by allowing what Adam Smith called "the invisible hand of the market place" to allocate precious resources more efficiently and thus create greater wealth than is now being created on these Russian JSC farms.
The government has a big role to play here but it is the roll of law maker and policeman and not that of owner and producer. Let private individuals play the game of business. Governments need to keep the rules conducive to wealth creation and then to enforce them, being conscious of the need to keep the wealth distributed widely (I didn't say evenly although you don't want it concentrated among just a few) and not concentrated among the politically favored.
The Unites States Congress, beginning before the turn of the century, has passed major landmark antitrust legislation that encourages competition. 1. The Sherman Antitrust Act, passed in 1890, made it a criminal felony to create a monopoly by suppressing competition. Individual violators can be fined up to $250,000 and sentenced to up to three years in prison for each offense. Corporations can be fined up to one million dollars for each offense. 2. The Clayton Act, passed in 1914, is a civil statute (no criminal penalties) that prohibits certain business practices, such as giving special rates to certain customers, if it lessened competition or tended to create a monopoly. Individuals injured by an antitrust violation can sue in federal court for three times their actual damages. State attorneys general can sue on behalf of consumers in their states. 3. The Federal Trade Commission Act was also passed in 1914. It created the Federal Trade Commission (FTC) to enforce the antitrust laws. In 1938 the Wheeler-Lea Act gave the FTC the added responsibility of protecting the public against false or misleading advertising. As originally written, the Clayton Act only applied to "horizontal" mergers. The Celler-Kefauver Act of 1950 amended the Clayton Act by broadening it to include any merger that "lessened competition or tended to create a monopoly."
Karl Marx predicted that capitalism would destroy itself by concentrating the factors of production and thus limiting competition. Capitalistic countries have been far-sighted enough to pass laws that favor and encourage competition so as to keep capitalism viable.
In Russia you can see that private ownership works, even in these communal communities, as the people take good care of their own small plots of land and the crops and animals that they raise there while virtually ignoring the needs of the JSC's farming operation, which they theoretically own but for which they have no feeling of ownership. They therefore lack the incentive to work hard that comes with true ownership. The JSC is the only employer in this community, but the JSC "stockholders" basically ignore it, viewing it more as a "free supply depot" where they can steal supplies needed for their own small private operations rather than viewing the JSC as a source of their livelihood. Under these conditions they are pessimistic, depressed and non-productive and often under the influence of vodka.
What a miserable way to exist! No wonder these people talk about the "good old days" of the Soviet Union, with its security, and continue to vote communist in a futile attempt to go back to a situation that was artificial, usually corrupt, and which, while they won't admit it, went bankrupt itself, both morally and economically. These state farms were never efficient enough to compete on the world market and historically survived only because the state subsidized them. Now the state is broke and subsidies are no longer being paid. The government can't even pay its wages on time. Russia can't go back to collective farms. History has proven that, but how can we help them to go forward?
Before letting the reader tackle that question, let me record what I saw during my visit to this collective - JSC - farm and community that has inspired me to write so passionately in favor of a market economy, realizing that a market economy 1. provides the incentive for people to be industrious as a result of private ownership and the realization that they personally benefit from what they produce and 2. where there is enough competition to provide buyers with choices so that the "invisible hand of the market place", 3. using the market place to set prices, is allowed to allocate limited resources efficiently so that the basic economic questions of (a) what is produced, (b) how much is produced, (c) at what price and (d) who gets what are answered and answered in a manner that provides a maximum standard of living for a population.
Back to the JSC farm!
(Some of my observations appear to be recorded more than once but that is because different people supplied the information and it was sometimes conflicting.)
I was the first American to visit this collective farm and the first one most of them had ever met. The farm director said that everyone in town knew that I was going to be there. The Ivanovo area has the highest unemployment in Russia and voted for the Communists in the last elections. A pleasant middle aged lady named Isolde is the farm director. Previously, she was a teacher and the city administrator. She earns a salary of 370,000 rubles a month (5400 rubles/US$ or $68.50), which is less than she received as the city administrator. She is not paid regularly. She took the director's job when asked to do so because she felt that it gave her a better chance to help the community. She was apparently a popular teacher and many of the town's people had gone to school to her and thus she is viewed as a "mother figure" who is supposed to work miracles and make their life more economically satisfying.
Rather than electing a parental figure as the manager they, like many JSC's, need to employ a "Turn Around Manager" who has no allegiance to anything except converting a business that is loosing money into one that is making money. (For a discussion of this topic see "Corporate Turnaround" by Donald B. Bibeault. McGraw-Hill Inc. 1982.) While I don't think it is the case here, many managers are so entrenched with other "people of influence", both within and outside the organization, for the purpose of enriching themselves by clandestine and often illegal means that it is virtually impossible for them to make (or want to make) the necessary management decisions to transform an enterprise to profitability. The lack of knowledge and of desire for change by many farm directors, and others in a comfortable position of power and authority, is really holding Russia back in its conversion to a market economy. A lot of managers need to take "early retirement" and let the younger generation take over if a rapid move to a market economy is to be realized.
In a country where people are grossly underpaid there becomes a "shadow" economy where people are enticed to extract additional income for themselves by questionable means to support their families and this is usually done at the expense of the appropriate profit oriented management. Once this kind of corrupt network is established most people don't want to make changes in management as they would then have to re-establish their favorable contacts. Managers are thus usually re-elected by the stockholders of the JSC. Many of the JSC stockholders are retired people living on a pension from the JSC. It would seem that many of Russia's organizations in all sectors, public and supposedly private, including even educational establishments, are thus "grid-locked" into maintaining the status quo and thus don't have the ability from within to make the proper management changes. This is where an independent turn around manager is needed. Turn around management is becoming a popular topic but there aren't many such qualified Russians.
There is an obvious cost to society when people make supplemental incomes via devious means. While they get some extra money, they go to a lot of extra effort that is counter productive for the JSC to get it, often with many people within the organization so negatively engaged. This is wasted effort for the aggregate of society. If the assets lost due to theft were instead paid out as legitimate wages and the corruption were eliminated and good management allowed to prevail, there would be more wealth produced and Russian society would be able have a higher standard of living than is presently enjoy in their corrupt system. As one well placed Russian friend of mine said, "The system makes crooks of all of us!". How do you change that nationwide mentality?
Lenin felt that religion was "the opiate of the masses". He and Stalin destroyed many churches and suppressed freedom of religion and thus destroyed one of the country's main sources for teaching ethics. The country shows it and pays dearly for their lack of same. Compare the attitude towards honesty and respect for private property in Russia with that of Finland, where 90% of the population is Lutheran and another 6% is Russian Orthodox. Religion, and particularly the Russian Orthodox Church, is making a comeback in Russia. In addition to religion's other benefits, perhaps the Russia people will be able to improve their ethics and this will show in the way they conduct their business as well as in their private lives. This is going to take more than one generation.
An outside turn around manager, with plenty of bodyguards, would have a better chance to convert losers into winners than most of the existing managers. In doing so he/she would undoubtedly make most everybody unhappy for various reasons. Unhappy people in Russia are known to take the "one vote" approach and to eliminate the cause of their frustrations by doing bodily harm to the reformers and thus being a reformer is a risky business.
Western humanitarian aid organizations can do all sorts of educational activity in this country but until we can get past the management "grid-lock" and their inability to make changes meeting and until we can get managers to look at long term corporate goals rather than personal short term gain, we are fighting an uphill battle. Unfortunately, that is Russian reality today.
Back to our story.
We reached the farm after traveling over muddy roads that a four wheeled drive vehicle would have been suited to traverse with greater ease than was our single axle drive car. We entered the business and accounting office of this JSC, which did not have a computer or an electric typewriter. It did have an abacus and a hand held small calculator. We learned that the dairy farm is the main economic for the farm. The crops and forages that are raised on the farm are fed to the cows, making the sale of milk the income generator. The dairy has about 850 animals including 450 milk cows (black and white breed) which are averaging 2600 liters of milk per lactation. (At another time I was told that 435 cows are producing 1,500,000 liters of milk per year, which would put production at about 3500 liters per lactation.)
They prefer to sell their milk to a private creamery for 800 rubles/liter but this creamery presently owes the dairy $40,000 for previous milk deliveries. The dairy is trying to work with the private creamery as they would like for it to succeed. Because they need cash, the dairy sells some of their milk for 700 rubles cash at another creamery. They take on some additional marketing functions and sell some retail for cash in the local market for 1300 rubles. Earlier in the day, we visited this private creamery just outside of Ivanovo. They admitted that they were behind in their payments to their suppliers and that they were having trouble getting enough milk to process into butter, cream, sour cream, white curd and pasteurized milk to meet market demands. They don't produce yogurt or cheese. The creamery plant also ran a bakery and bartered for milk by supplying bread to the dairies which the collective farm could then barter to their employees for some of the back wages that they were owed. The creamery also had access to shoes and other items that were used for barter.
The dairy processing plant had seven milk suppliers during the summer but there are fewer now and they need more milk for processing. They didn't have a label on their products but were working on it. They said that their products were superior in the market place and thus I encouraged them to get their products labeled so that the consumer would be able to select them and perhaps they could then be sold at a higher price.
Payment is in three forms: rubles, barter and a script that the Ivanovo Oblast apparently issues for items they need. The script can then be used to pay for other items in the oblast, including the payment of taxes to the oblast. This looks like a spurious local monetary system that would be illegal in the USA. It would also seem to be easy to deflate in value simply by printing more of the script, which even civilized governments are prone to do.
(The Russian Federation has wiped out the life savings of many of its people by running their printing presses overtime printing rubles. A vivid example showing the effect of the devaluation of the ruble during the last decade involves the American Embassy and its renting of Spasso House from the Russians for the living quarters of the American ambassador. In the mid-1980's the Russians and the Americans signed a twenty year contract, payable in rubles (and without a cost of living adjustment), which at that time was equivalent to about 60,000 U.S. dollars a year, on an asset valued at over fifteen million dollars. With the extreme inflation since that time, the ruble has devalued so that the American government is paying less than $25.00 (that's twenty five dollars) a year. The Russians are complaining and trying to re-negotiate but they did it to themselves by printing money and managing their economy so that they felt that they had to print rubles. Zuganov, the communist leader, is still suggesting that the government print money to pay off its debts. The International Monetary Fund and the World Bank base their loans to Russia in part on Russia's ability to keep inflation under control..)
The dairy plant pays producers for their milk based on the bacteria count, butterfat level, acidity and whether the milk is cooled to less than 10 degrees C. before being delivered to the creamery. This dairy plant's cash flow problems were of course contributing to the cash flow problems of the collective farm we visited and the JSC in turn couldn't pay wages, buy supplies, etc. The workers of course have their buying power curtailed. It is a vicious circle. Not paying wages reduces the amount of money trying to buy goods and is one of the reasons given for Russia being able to reduce it's annual inflation rate to low double digits continue during the last year. You wouldn't get away with this in the USA.
At the dairy we visited the barns before the cows were brought in from pasture. None of the automatic barn cleaners were operable so that manure was laboriously removed by hand to the pit at the end of the barn from which it was pumped or augured into trucks for field application. They said much of the machinery on the farm was not in operating condition. The floors in the dairy barn were made of wood and thus not easy to clean, particularly since the barn was old and the floors were in poor condition. The floors were well soaked with urine and manure.
The farm has 900 hectares (2.48 acres per hectare) of grain land and 750 hectares of forage land. The minimum wage in Russia is 250,000 rubles ($46.00) and she said they paid about 25% of this. (I think from figures we'll see later that she meant that they were late in paying them.) There are 400 people in town with 60 of them working on the dairy. There are 24 specialists and managers, such as A.I. technicians, accountants, economists, etc., 35 drivers, machinery operators and crop workers, 5 working in kindergarten and 10 working as cleaners, security, etc. making a total of 134 people on the payroll. There are 110 students in school with 16 teachers. There are ten doctors and nurses. There are no other jobs in town other than the ones on the collective farm, although about ten people are merchandise traders. There is one store and a post office. It is a true "company town" with the collective farm producing milk as the company town's primary income generator.
I came as a nutritionist and it was easy to determine quickly, after learning that the cows were being fed late cut mature grass hay, which was moldy, and ground barley and oats, that the cows would be deficient in protein. They were still on pasture (late Oct) and may have gotten some protein there. When I asked about protein supplements they said they couldn't afford them or any other purchased feed. I suggested that they barter some milk for a protein supplement. They said they would explore that option in the next few days. I was told that they had to kill a cow and to sell the meat in order even to buy salt. No vitamins or minerals are fed. They feed pine needles hoping they supply some vitamin A.
I suggested that they sell some cows in order to buy enough feed so that they could feed the remaining ones adequately but was told that if the cows were sold that the money would go to pay the back wages rather than to buy feed . This didn't quite compute as Isolde said later that she and the accountant could determine how the money was spent.
We then had a nice dinner with Isolde and some of her managers where we discussed many of their problems and possible solutions, but didn't find much about which to be optimistic. We also discussed some of the problems in Russia. When I asked Isolde what she would do if she were Yeltsin, she replied, "Die!". She also said again that any money obtained by whatever means would have to be used to pay back salaries because of the demands of the unpaid employees. Paying back wages apparently takes all the available working capital and effectively shuts down any hope of making this dairy profitable.
I said that I would like to see the cows, so we went back to the dairy. On our previous trip we had walked through the town, giving us a good idea of the living conditions and the situation there. It was dark by this time so we were driven over in farm vehicles.
The cows were in surprisingly good body condition in comparison to what I had expected to see after being told what they were being fed. This could have been because the protein levels were too low to support any more milk production. This would mean that available energy could not be used for milk production, as the energy would need to be combined with protein to synthesize milk, and thus the energy, as body fat, remained on the cows. Body condition scores were three to three plus on a ranking of 1 to 5 with one being thin and five being fat.
During this tour we met the dairy manager. She said that the USA dairymen are to be envied with the more favorable conditions under which they work. Most of the people working at the dairy were women. Since we were there as they finished milking, they asked if we could have a conference with them. There were about 18 present. They asked a lot of questions about the USA as they had never had that chance with a real live American before.
I also asked them questions about the dairy. They said that they had a 13 month calving interval with two ampules of semen per conception. If these figures are correct, that is fine as both of these numbers are acceptable. The average age that a heifer enters the milking herd is 30 to 36 months, where 24 months is desired. This was easily explainable when I found out later that the calves are weaned at one month of age, rather than the preferred two months and are not fed any supplemental protein. Young calves should receive a total ration with 18% crude protein on a dry matter basis. These calves are fed no supplemental protein and since the forage is grass or corn silage and only grain is added, they are severally deficient in protein. Silage is fed much too early. A young ruminant should not receive much corn silage until it is six months of age. The calves I saw were pot-bellied and stunted in growth. I saw the same problem in Hungary ten years ago when I was there as a consultant on heifer raising for the American Holstein Association.
The calf pens were not sanitized, were in a room without adequate ventilation and the calves could have direct face contact with each other by reaching between pens and thus could spread diseases easily. I was told that sixty-eight out of 544 calves died last year, or about 12.5%. They presently have 1300 (850 was the number previously quoted) animals on the farm with 450 milking cows. The number of cows they presently have seems to be lower than the number that calved last year. Isolde confirmed that they had more cows last year. She said they had places for 490 cows, so the numbers still don't jive. They have 110 heifers. Most will be saved for replacements but some will be sold to private farmers so that the collective can buy feed.
During our conversation with the dairy ladies (plus a very few men) they said that they bred the cows during the first heat that occurred 45 days or more after calving. They wash the udder and begin milking three to four minutes later. For maximum milk let-down this should be started within a minute of massaging the udder. They said that the more experienced milk maids did get started within two minutes. They use the same dirty rag without disinfectants among a number of cows, making it easy to spread mastistic infections. They said the water was boiled that was used for washing. They claimed they had little mastitis, which is a miracle with the poor sanitation, poor milking procedures and inadequate nutrition, including deficiencies of protein, vitamins and minerals; all nutrients that help to build the immune system and thus reduce disease problems.
When I asked them how they could get more milk, they said that the mechanization level of the past needed to be restored as did the labor discipline and they all seemed to know that they needed to feed better. They said the people were pessimistic, discouraged, drank too much and didn't get paid. During this meeting, when Isolate the director asked me, "What should I do?", I didn't really answer as I didn't want to say in front of all these workers that they have to truly privatize, reorganize and restructure the entire operation and that that would mean the loss of jobs for some of them. I didn't want a lynch mob turned loose in town that night since Slava (LOL translator and coordinator) and I were going to stay at the director's home.
After this exchange I talked about Russian and American relations and how much I enjoyed living in Russia, and in general, bragged about the things in Russia that are favorable and balanced this by discussing some challenges. A number of the women thanked me "spaceba bolshoya" as they left, so I think we all felt that it was a worthwhile encounter. It is a challenging situation when you are the first American with whom they have ever spoken. It was a learning experience for all of us. You really feel for these people when you realize the very few options that are available to them.
In general they seemed to blame their troubles on the government and private farmers. This group of dairy workers felt that they were causing the disintegration of the collective farms. They didn't take much control of or responsibility for their dismal situation, which would be natural after 75 years of being told what to do, with those who disagreed with the authorities historically being sent off to far away places with many never returning.
The apartments and houses in the town are owned by the JSC. The occupants take care of their own maintenance. Isolde is elected by the town's people as is the seven person board of directors to whom she reports. It is interesting that the JSC stockholders don't elect just the board and then let the board elect the manager because where the stockholders elect both the board and the manager, the board doesn't have the power to hold the manager's feet to the fire and demand performance. Isolde reported that the board and stockholders are rather conservative and resistant to change. Pensioners make up one third to one half of the population. Since they are members of the collective, they also have a vote. They are reportedly against an auction that would transfer the farm's assets to individual private ownership.
People past retirement age are a special problem for JSC's as these older people must be cared for during this transition to a market economy as they don't have the option of starting the earning part of their lives over. The burden on the collective farms (JSC's) to make ends meet and to still pay the pensions and supply housing and services for retirees is an especially difficult problem. The state and local governments do not have the resources to take over the responsibility of supplying these needs. The JSC's need to be relieved of this burden and allowed to function as a business run for a profit rather than to be involved with charity and being held responsible for satisfying so many social needs that suck up the JSC's working capital. Changes could be made so that paying taxes would be one of the JSC's costs and this government revenue could be used to satisfy social needs, including caring for retirees, and thus give some relief to the JSC, or at least change how the money flowed.
I asked Isolde about discipline for non-performers and she said that she couldn't do much as the people she disciplined would continue to live in the village and if disciplined would cause even more trouble, including stealing. It's hard to have good personnel management when you don't have discipline in the form of dismissal as one of the options to use after you've exhausted the positive personnel management techniques without favorable results.
The milk cooling system was creative but primitive. They had a "swimming" pool with the depth similar to the height of the neck on the milk cans. There were planks across the pool so that a worker could carry a can of milk out over the water and then submerge it to the neck of the can. The milk cans had lids. When the milk truck arrived a hose with a nozzle was snaked in through the wall, the lid of the can was removed and the milk aspirated from the can. It would be easy to splash water around and into the open can, which could contaminate the milk. They said they regularly changed the water in the pool to keep everything "nice and sanitary".
When they offered raw milk to me that evening I declined. Floyd Bodyfeldt, an acquaintance in the Food Technology Department at Oregon State University, told me once that the only benefit of drinking raw milk was population control. I didn't want to risk being eliminated yet as I'm having too much fun in Russia. In addition, the toilets at the state farm were primitive and it was a very long drive back to Moscow.
Slava and I met with Dr. Ali Aliev, the JSC's veterinarian. He has worked for this collective dairy farm for eleven years, including when it operated under the old communist system. He was then a part of a vet clinic that serviced several collective farms. It was formerly supported financially by the district authorities, with centralized distribution of medicines. That system is now history. Each farm must buy their own medicine and this farm doesn't have any money. The vet has not been paid for months so does other work (including non-vet) off the farm to survive. He has a wife, who doesn't work outside the home, and three kids. He has dairy animals at home that he uses for milk and meat.
Dr. Aliev said that the cows do not have milk fever, which is probably because these are black and white cows (not Holsteins) and they are neither bred nor fed for heavy milk production. There is influenza in the calves. He said calves were born in poor condition. He reported the calf death loss at 20 to 25% but other figures suggested that it was about half this high. There is a lot of metritus, many calving problems requiring that calves be pulled and some incidence of retained placentas. He attributed these problems to poor nutrition, including a shortage of protein, vitamins and both major and trace minerals.
He said that the calves were force-fed colostrum within two hours of birth, which is a good husbandry practice. Pre-partum cows are given blood tests for antibody titer levels. They find low blood sugar levels. I didn't learn about the antibody levels. They calve year around with greater milk production in the spring when the cows are on green pasture.
We looked at the three open trench silos. There was no plastic covering or any other kind of protection (except some straw) from the rain that was falling and the expected snow to come. I could see old plastic near the silo from last year. When I asked why they weren't using it this year, he replied that they didn't have money to buy plastic this year and as a result would lose half of the silage in the pit. He said at least the top 15 centimeters of silage would freeze and be lost. "For want of a nail a shoe was lost, for want of a shoe a horse was lost, for want of a horse a war was lost, etc."
He said they would run out of silage and feed during the winter and it would be difficult to find more and even more difficult to pay for it if they found it. It seemed like the answer would be to sell some cows now and buy feed rather than have them all starve later. He agreed they needed to reduce the size of the herd but said that you couldn't sell a pregnant cow for meat.
While the cows are in good shape now, he said that when they went inside for the winter they will lose weight from insufficient feed. They were still pasturing these cows the end of October. The grass was green but not abundant. He said that when the cows went inside they would be fed 10 kg of silage (They used to feed 30 kg.), 2 kg of hay and 1.5 to 2 kg of grain. The grain was allocated one kg for second level producers, three kg for high producers and one kg for the calves. This is not adequate feed. I don't believe that these figures quoted are entirely correct as this adds up to less than half of what the cows could eat on a dry matter basis. They definitely are not getting enough feed over maintenance requirements to support good production.
He said that ten years ago they had adequate silage and the cows were fed well all year. Under the former communist system the grain was mixed elsewhere and brought to the state's central storehouse and then distributed to the various state and collectively owned dairies in sacks. Now these "privatized" dairies grind and mix the feed themselves.
Dr. Aliev said they need 5000 tonnes of silage , but had only 1500 tonnes available. They need 500 tonnes of hay but have only 400 tons of poor quality hay available and what they have is stored outside and is unprotected from the elements. They have 300 tonnes of grain. He said they got the necessary forage grown but left a lot in the field because they couldn't get it harvested due to equipment break downs, lack of fuel, etc. When I asked why they didn't harvest it by hand as they do in Mexico and remarked that I saw hay stacks in front of houses on this collective that I imagined were put in by hand, he said that people weren't receiving their paychecks and therefore were in no mood to work and in particular had no incentive for doing extra hand work. They obviously did not have an ownership mentality directed towards the needs of "their" farm.
Besides, he said, they were busy putting in their own hay for their own livestock. People have pay checks only on paper, so they must produce milk and meat for their own consumption plus hopefully some for sale. Everyone has the use of some land and they own livestock and they prepare their own feed. You therefore couldn't get people to work for the collective (JSC) that they owned on paper but they would work for their own selfish private interests. Isn't there a lesson to be learned in here some place?
I asked if people stole from the collective farm and he said "Da!". They steal feed at night and the workers find it gone in the morning. They don't steal silage he said. What they steal they use as supplies for their own little farm plus they sell some for money to buy alcohol. Isolde said that stealing wasn't a big problem on this farm. It is on most of them.
(When we were in Krasnodar in March of 1996 I asked Vladimir Don, a private farmer there, if he had any trouble with people stealing from his farm? His answer was that "if you aren't stealing, you aren't Russian.")
I think the collective farm becomes a free supply depot to supply private interests of the community of unpaid workers. In a civilization where stealing is almost accepted and when workers are marginally paid and even that pay hasn't been paid for months, you can sure see where "situational" ethics would take over and the unpaid workers would justify taking their pay in whatever they could remove from the collective farm since "they were owed it anyway".
Stealing from the collective becomes a form of "subsidy" and this makes it hard for a legitimate enterprise that must buy supplies at the market price to compete with these "subsidized by theft" producers. Mr. Volkov of Intensekorm, an agribusiness conglomerate in Samara that has an Agricultural Training Center in partnership with the U.S. Feed Grains Council, said that he went out of the pig business because he couldn't compete with small private swine producers who stole their feed and therefore could sell for lower prices than legitimate producers that had to pay market prices for supplies.
Stealing of farm supplies takes on other costs. When I was in Samara in 1993 I noticed that the dairy rations contained expensive soybean meal rather than the more economical cottonseed meal. When I asked why, I was told that the milk maids will steal about 30% of the dairy feed and feed it to their pigs. Since cottonseed meal contains gozzypol, which is toxic to pigs, they use soybean meal instead of cottonseed meal in their dairy rations so as not to poison the pigs owned by their milk maids.
When a Russian asked me what I'd do about this, my reply was "to call a spade a spade" and tell the milk maids that the farm would supply them with a specific quantity of properly formulated swine feed as part of their compensation (and thus their pigs would be expected to better than when fed the dairy feed) and that henceforth the dairy ration would contain cottonseed meal and perhaps even urea and that they must not steal it and feed it to their pigs as it may kill their pigs. I was then told that they also steal and feed the dairy feed to goats, horses, ducks, chickens and anything else that eats.
You have several costs here. The dairy ration is formulated at too high a cost so as to protect the milk maids' pigs. The feed fed to the pigs (and other livestock) is not properly formulated to support optimum swine performance. And of course, the stolen feed represents a cost to the farm from which it was stolen. This low cost pork production then competes with legitimate producers and may force them out of the market. The interest of the workers is also diverted from doing a good job for the JSC, because they must figure out how to steal without being caught. Russia needs a strong dose of ethics, accompanied with adequate income, to survive without feeling that they must steal.
Dr. Aliev predicted an impending disaster as the entire community depends upon the sale of milk from this farm. When I asked him what needed to be done, he said to sell at least half the cows NOW, but since many are bred that is a problem. He said herd reduction was the only short term solution. (It is obvious that if they don't have and can't buy enough feed to get them through the winter that some cows must be sold now or the whole herd will starve to death sometime this winter when they run out of feed.)
Dr. Aliev said that the only real and long term solution was to privatize, reorganize and restructure the farm via an auction. He added that true individual privatization must occur as people will do hard hand work for themselves but not for the collective farm. With an attitude like that I think that he should be chairman of the board of directors or, as much as we argue against it, even a Pinochete (former president of Chile) type of dictator that would install a market economy by force. (Friends I know in Chile said Pinochete was a necessary evil. Chile is now doing very well economically under a freely elected president other than Pinochete, although Pinochete is still in charge of the armed forces.) Let's however try to help Russia convert to a market economy in a democratic manner.
This is truly a dysfunctional communal society but it doesn't have to be! There are options but I see no signs of it getting any better without taking drastic measures and I think that that means an auction so as to put the assets in the hands of private owners.
We stayed the night at Isolde's house which she shares with her retired husband, Fyodor, and their approximately 20 year old son, Dmitry. Dmitry is in the military and is a specialist on radio and radar technology. They have an inside "outhouse" with a board with a hole in it over a pit in the ground in an adjoining room. You would think that they would have a plastic toilet seat that they would hang on the wall to be removed and used as needed. It would cost less than two bottles of cheap vodka, but there was no such luxury, although they did offer me vodka for supper and again for breakfast. It is this kind of failure to do even simple and obvious things that cost little or nothing and that would make life more comfortable that makes me really wonder about Russia and it's ability to make big changes. If the Russians in general would take just a little of the money and time that they spend on drinking vodka and smoking cigarettes and fix and clean up their surroundings, it would make a big difference, to say nothing of the health benefits, but that is another story. Russia looks like a tough place to be a women.
Besides the enclosed outhouse, this room also houses a cow, a calf, pigs, chickens and a goat. Surprisingly, there wasn't much smell. The house was comfortable and Isolde and her family were very hospitable. They had a sink with only cold water. I understand that to bathe they go to the community sauna, usually once a week.
After spending the night at Isolde's we returned to the farm headquarters. We learned that they had been able to harvest only half of the forage grown. No one took the responsibility to harvest the forage, with the men and women responsible for the grain harvesting not willing to help harvest the forage. When I asked if they allowed people to harvest the unused forage by hand for their own use, they said no. (It would set a poor precedence of course to give away forage free to workers because they refused to harvest it either with machinery or by hand. It would then be to their benefit to sabotage the equipment and not to work if they knew that they would later get the forage free for the taking.)
Three hundred hectares of forage were lost. Because they didn't get it harvested they burned over 100 hectares of fields containing clover and grass forage. Losing the clover was a particularly important loss as the cows need protein and the clover forage would help a lot. Clover, a legume, is the principle and source of protein on this dairy as they aren't buying protein supplements. It is of course pretty poor management to invest in raising a crop and then not to get it harvested, particularly when you will have cows either starving to death later or have to reduce their numbers.
The end result is that the one item that the collective sells - milk - will be reduced in volume, further exacerbating an impossible economic situation. The rapid decline and imminent death of this collective was accelerated by them not getting half the forage harvested last season. When you then again halve the amount harvested because of losses (most of which are preventable by buying plastic to cover the silage pits and the hay) you are looking at a disgusting example of poor management. A lot of people will suffer. This farm can't win for losing! (Bring on the auctioneer and reorganize and restructure this farm and others before more of Russia's resources are lost forever!)
The JSC was able to harvest all the grain. One hundred tons of straw was stored. They must feed the cows inside the barn from the first of November until the middle of May and they don't have enough feed to make it.
The zoo-technologist, Ekaterina Smirnoff, said that the herd could give 4000 liters of milk average per lactation if they were fed properly. She said that they could buy some feed from private farmers or borrow some forage and replace it with next year's harvest (a form of more debt!). Barter is common. Isolde is going to try to barter some milk for protein to feed to the cows. When I suggested that they sell some cows now to buy the necessary feed, I was told again that any money that came in from the sale of cows would go to pay the back wages rather than to buy feed. This collective has an enormous big black hole of debt that will suck up all the money that could possibly be generated, leaving no cash for working capital. The zoo-tech said that the manager needed an assistant manager.
Up until last year, the monthly payments for wages and other debts were regular, so this is a rapidly developing crisis. The zoo-tech said she thought people will realize that they must work for the collective as well as for themselves. The situation is getting worse, not better. They hope to install meat processing equipment. People are serious and desperate.
In talking with the zoo-technician I talked about the need to supply more protein, vitamins and minerals. I acknowledged to her that she knows everything that I was proposing but that she is thwarted by not having enough money to do what she knows needs to be done. Improved nutrition would improve health and production and reduce the vet bills and the loss of animals.
This is called a JSC but it appears to be a collective where the members, rather than working communally for the good of the collective, all work for themselves. The collective can't pay the workers. The members steal from the collective farm. There is no sense of ownership among the JSC stockholders of the collective. It is an unnatural situation to think that people will work for the benefit of others rather than themselves when they are so deprived of the basic necessities of life. Many people are blaming others rather than accepting responsibility themselves. Some said that half of the workers on the collective should be fired. Why can't people and managers accept human nature for what it is instead of trying to continue operating a system that would work only in a utopia, which is a pipe dream.
Why try to revive this production cooperative? It didn't work in the past and I can't see it working in the future. Having a cooperative to process and market agricultural products, as we do in the USA, makes sense but having a production cooperative doesn't. Let's face it! This is a dysfunctional collective farm and a dying farm community. Times have changed. It's time they moved forward and converted to an economic system that does work and that means converting to private ownership (hopefully at the same time the government will encourage competition and markets). It becomes increasingly obvious that this JSC needs an auction order to reorganize and to restructure this collective.
We next visited with the chief accountant and the chief economist. As I understand the situation, the accountant supplies bookkeeping data to the chief economist who analyzes it and makes recommendations to the manager. It looked like all records were kept by hand as there were no computers and I saw no computer sheet outputs. All the records I saw were hand written.
I asked the economist what she was recommending to the manager of the farm to do?. She said they needed to keep the dairy herd for milk and meat and thus they must try to buy feed to last the winter. She thought that perhaps they can barter something. She acknowledged that they can't find effective incentives for people to work. (I remember being told about the problems of finding incentives to get people to work by a Communist Party secretary ten years ago after I gave a lecture at a large state farm in Hungary to animal scientists from all over Hungary where he had been my translator. I suggested private ownership then and I do again now.)
It is obvious that the labor resources on this farm are being under utilized as there is no incentive to encourage them to work effectively, except for themselves on their own private places. The labor input per liter of milk produced is enormous and way above accepted norms in Western countries.
The financial numbers supplied by the economist were alarming and substantiated our concerns about the future of this collective. The accounts receivable shows the following:
One creamery owes them 200,000,000 rubles while a second owes them 25,000,000 rubles, for a total of 225,000,000 rubles ($42,000).
There are no other accounts receivable and little chance of collecting all of the above. They are trying to collect it by barter as discussed earlier. They are also trying to recycle the "script" that the local government has put into circulation.
Against the total accounts receivable of 225,000,000 rubles, the collective owes:
500,000,000 rubles for electricity. This has an aging of over one year.
161,000,000 rubles owed for fuel with an aging of six months.
118,000,000 rubles - 1 yr. local taxes. No foreclosure on land as the state already owns it.
117,000,000 rubles for three months of salaries and wages.
896,000,000 or about one billion rubles owed, which is equivalent to $185,000.
This gives them an accounts receivable to current debt ratio of 225/896 or 0.25. A current ratio of anything less that 2/1 is looked on with concern in the West.
I asked if there were an adjustment for ruble value deflation and was told that there was none. This seems totally ridiculous as the value of the ruble is continually deteriorating so that there is a strong incentive to withhold payment of money owed so that it can be paid back in cheaper rubles. People have even been known to withhold and invest the accounts payable money so that it will earn interest before paying their debts with cheaper rubles.
I asked the accountant about the above bills and why they didn't have their energy supplies cut off. The economist said that there was only a slim chance of losing their electrical supply even though they are paying only 1,000,000 ($185) rubles per week on the old bill, even though they are still consuming weekly, electricity worth 3 to 4 million rubles ($555 to $740). Obviously, someone (the state) is subsidizing this non-profitable collective to the tune of two to three million rubles ($370 to $555) per week just for electricity. An economically failing business should be "knocked in the head", liquidated and the resources put to more productive uses. Besides not being good stewards of their own resources, they are also consuming the resources of other unwitting suppliers. All of society is harmed by allowing this inefficient collective farm, and those like it, to continue operating at a loss. Russia didn't allow bankruptcy under the old system but they need to get used to it and accelerate it now before they squander more of their resources. (Because historically Russia did not allow bankruptcy, the whole country went bankrupt before they were forced to look at changing from a command to a market economy.)
The JSC economist said that their agreement with the electrical company was to pay one million rubles a week and the rest was not the collective's problem. There is only one meter for the entire collective farm so no one is responsible for their individual electrical usage. If they were individually responsible, limited resources would be utilized more efficiently. What incentive is there for the individual to conserve electricity if they aren't economically responsible for paying for it? She said it would be too expensive to install meters everywhere so that they could charge the usage to the actual user.
(Data I've seen show that centrally planned economies are only about half as efficient in the use of energy as are market economies. There are many examples in Russia of why this is true, including having to open windows to cool off centrally heated apartments as there are no controls to turn down the heat registers. Water is charged to our retraining academy based on the number of people there rather by the actual usage, as they don't have a water meter, so who cares if most of the toilets are continually running. Moscow is experiencing a drought and they are talking about water restriction. What they need is new toilet plumbing and new washers for their leaky faucets to stop the loss of unused water. They also need a general attitude of conservation.)
The economist also gave a listing of all of their assets other than their accounts receivable as follows: (I'm not certifying these as being the actual present salvage value of course.)
|Machinery and equipment||4,000,000,000 rubles||(740,000)
|Transport equipment||635,000,000 rubles||($117,600)
| ||($3,387,600 total)
(In addition, the land has value but that value isn't shown here. If Russia would sell it's land it could pay off its debts and still collect taxes on the land from those private owners using it to make a profit. This would pay off government debts, be a continual government source of income from taxes collected and encourage the efficient utilization of a major asset. This would allow the creation of more wealth than having the state own everything with all the inefficiency, corruption and lack of incentive that that engenders.
The buildings include the dairy, garages, two grain storage facilities, houses of the village, which include 100 living quarters - flats and houses, and the kindergarten. The school and hospital are owned by the rayon and not the collective.
Notice that according to these figures, even if they sold off all of their animals they couldn't pay their debts. The accountant's valuing of the animals appears very low if you check it by dividing the above number by 1300 animals or even by the 450 milking cows.
Since the highest value category (buildings) includes the houses, why not privatize them by auctioning them off to the workers? This could raise a lot of working capital. For starters, the occupants could bid their past salaries. This could offset that 117,000,000 debt ($22,000). I doubt if the people days have money to buy the rest of their homes and I suppose they would ask, why should they if they have them now for free, but selling off this real estate could raise more than enough money to pay off the debts of the JSC and still give them adequate working capital to buy feed, modernize, etc. Then they could use the services of an animal nutritionist rather than an auctioneer. The situation isn't hopeless and there are options, such as reorganizing and restructuring. The present dwellers could expect to pay off the residual value of their homes not paid by their back wages if the farm were operated at a profit and reasonable salaries were paid to the leaner but more efficient labor force. Since the people of the collective farm theoretically already own everything, including the debts, then liquidate the JSC out to private owners, pay the stockholder's any residual and let it all be run privately. It would have some chance of making a profit if that were done. Making a profit would indicate that the assets were being utilized effectively, which is of course the objective of good management.
When I asked the economist what was necessary to resurrect this collective, she answered that the government would have to give them subsidies. When I asked her where the cash strapped Russian government was going get money to pay the subsidies, she said, "That's not my problem!" I think there are other options available and these people could solve their own problems without government subsidies if they'd "bite the bullet" do it.
Leaving the problem solving to someone else is common in this land where for over 70 years people weren't supposed to think but were expected to just follow orders. People need the opportunity to succeed or to fail by their own actions and they need to learn to take responsibility and the appropriate action themselves so as to be responsible and accountable for their own success or failure. When they learn to look out for themselves rather than expecting others to, Russia could recover. Please bring on private ownership before it is too late! There appear to be adequate assets available on this JSC to put this operation on its feet if an auction of the non-essential JSC assets was held.
The chief economist re-emphasized that the collective would go bankrupt without government support as it isn't possible to survive this way. She said that within two years the equipment would be depreciated out and unusable. She said it has never been this bad before. The collective members are pessimistic. They have no place to go and they realize that they can't continue this way.
When I asked her if they could go back to the old and the old ways, she said she didn't know. She stared into the distance and said that "something will happen". She had no answers or solutions. She then added that "They still had hope and hope dies last".
As we left the office of the chief economist and chief accountant, Slava, my associate from Land O'Lakes, remarked that "there was no decision making going on in that room". He summarized that "We're seeing the last kicks of a dying animal." When he heard me ask why somebody doesn't do something, he reminded me that while changes had to be made in Russia, I should remember that "not all the slaves freed as a result of the U.S. civil war wanted to be free and to leave their master and not all these Russian people want to change either, no matter how bad it gets."
As I experienced the dismal situation of this collective farm, lots of thoughts kept running through my mind, including the statement made by one of the workers at the milk barn during our discussion that what they needed was discipline. I began to comprehend more clearly that before perestroika the people had strong discipline but little freedom, so they did what they were told or else. The incentive to work was the fear of punishment. You could call it negative personnel management.
Today, the people have freedom without the fear of punishment but the removal of this negative incentive (punishment) has not been replaced by positive incentives such as the economic ones that come with private ownership and the opportunity and freedom to make choices that will determine their success or failure. As a result, we have learned that under these conditions, people have not worked adequately in the past, are not working adequately now and you can't expect them to work adequately in the future.
Something drastic must and will happen. It is better that an economy be built in Russia as grow soon as possible based on free market principles than to wait for another revolution led by hungry and desperate people who haven't created enough wealth, while laboring in a command economy, to supply life's basic essentials. The world is too small and communication with the outside world is too readily available to keep the truth from them. They see that there is a better way to produce wealth than they have been experiencing for at least the last 75 years since the decidedly "un-glorius" revolution of 1917 that has proven to have been a terrible disaster for the good people of Russia. The younger generation knows what is going on and is demanding that changes be made. I have hope for Russia.
Robert Heilbroner in his book, The Worldly Philosophers (Simon and Schuster 1953) reported on the failure of earlier experiments at communal living where there was no ownership of private property and where people were expected to contribute according to their abilities and receive according to their needs. One such experiment was undertaken by a rich English industrialist by the name of Robert Owen. Mr. Owen, after having made a fortune in New Lanark, England as the result of his progressive labor management of textile mills (he was fair, treated his employees with respect and rewarded performance), decided to become a "utopian socialist". With his own money he bought thirty thousand acres on the banks of the Wabash in Posey County, Indiana. On the Fourth of July, 1826, he dedicated it with a Declaration of Mental Independence - Independence from Private Property, Irrational Religion and Marriage - and then left it to shift for itself with its lovely wishful name of "New Harmony".
There was no private ownership by the inhabitants of New Harmony, no planning and not even elementary precaution against fraud. Opportunists took advantage of the situation, rival communities sprang up and the acquisitive habits of the participants proved stronger than their mutual bond of ideas. Two years later in 1828 it was obvious that this "utopian" community of New Harmony, Indiana was a failure and Robert Owen sold the land and in the process lost 80% of his entire fortune.
Russia has experimented with a market-oriented economy before. The czars encouraged it from 1861 until 1914. In 1858 Russian wheat exports totaled 12% of world wheat exports. By 1909 to 1913 the share increased to 22% and Russia became the world's largest wheat and oat exporter. This ended with the Bolshevik Revolution and the imposition of severe economic restrictions that included sending the military to requisition crops so that hungry people could eat. By 1920 Russian agricultural production fell to only 64 percent of its 1914 level.
Even Lenin realized that private ownership in Russia was necessary if he were going to retain power. He introduced his New Economic Policy (NEP) in the Spring of 1921. (Lenin by David Shub published by Doubleday and Company, Inc. 1948). In 1918 Lenin had regarded private enterprise as an anathema. Lenin however was a pragmatist and could change his position when it was necessary for his survival. By 1921 "he admitted that private trade was indispensable for restoring Russia's economic health. The wage system was restored and peasants' property rights in their produce was recognized. The 'civil war in the villages' was brought to an end. On 15 March 1921 Lenin declared; 'We must try to satisfy the demands of the peasants who are dissatisfied, discontented, and legitimately discontented, and cannot be otherwise…..In essence the small farmer can be satisfied with two things. First of all, there must be a certain amount of freedom of turnover, of freedom for the small private proprietor; and secondly, commodities and products must be provided'.
"With the introduction of the New Economic Policy, economic efficiency rather than Communist theory became the chief objective of the Soviet industrial experts and technicians. Workers were paid in accordance with the value of their services.
"Lenin recommended that the return to private enterprise be applied first to agriculture and then to small industry. Basic industries and transportation as well as foreign trade would remain under government control. He therefore foresaw no danger of a capitalist revival as the result of the New Economic Policy. The new system Lenin gave the name of 'State Capitalism.'
"engine The NEP did not, however, come in time to avert the famine resulting from crop failure and the lack of reserve supplies, caused by Communist policy toward the peasants since 1918. According to official Soviet figures, starvation took the lives of no less than 5,000,000 people in 1921 and 1922."
Later in 1921 Lenin's health began to fail and he died on 21 January 1924. During this time period "He now dubbed the policy of prohibiting the development of private trade as 'stupid and suicidal'. And he embarrassed orthodox Communists with the order: 'Learn to trade.' Lenin was restoring the monetary system and explained: 'If we succeed in stabilizing the ruble, we have won.'
"Lenin no longer wanted to set up compulsory collective farms and to establish the communal tillage of soil.
" 'We have done many stupid things with regard to collective farms. The question of the collective farms is not on the order of the day. We must rely on the individual peasant; he is as he is and will not become different within the near future. Peasants are not Socialists, and building Socialist plans in the same way as if they were Socialists means building on sand. The transformation of the peasant's psychology and habits is something that requires generations. The use of force will not help. The task before us is to influence the peasantry morally. We must give consideration to the middle peasant. The efficient peasant must be the central figure of our economic recovery.'" (Underlining by Lenin.)
In 1924 the Russian government encouraged the New Economic Policy as a market-oriented economic reform. Agricultural production responded dramatically and in 1928 agricultural output was greater than it was even during 1914. State price controls were put in place that resulted in shortages that led to the end of the NEP.
Quoting from the article, Agricultural Reform in Russia (Goodwin, Grennes and Leetmaa writing in Choices Magazine 3rd quarter 1996), "Ceilings on official prices at state stores created shortages and diverted supplies to higher-priced private markets. The experiment (NEP) ended in 1929 when the government imposed compulsory delivery quotas on producers. In 1930 the government declared all private trade to be the crime of speculation, and forced collectivization of agriculture. Moscow tightly controlled Russian agriculture from 1930 until the current reform."
Lenin tried to have Stalin removed from the line of succession and on 5 March 1923 (quoting again from Lenin by Chub) "dictated a note to his secretary announcing the severance of 'all personal and comradely relations with Stalin'." Stalin of course did come to power upon Lenin's death and soon collectivized Russian agriculture. Russia is still suffering from the disastrous results of Stalin's policies. By the end of 1929 the New Economic Policy of more economic freedoms was over and strict controls imposed.
Getting back to our own work here in Russia, we must be aware that obtaining success from our work on projects such as the Russian - American Agribusiness Training Partnership and other Western humanitarian self-help programs has a time limit and the clock is running. If you believe all the negative economic indicators that are published in the Moscow Times and Moscow Tribune, positive changes need to come soon. Even the International Monetary Fund has lost confidence in Russia and is postponing the delivery of their $330 million monthly loan tranches until "Russia gets its act together!"
Russia is broke with an industrial sector working at only half the output of that prior to the start of reforms in 1991. Wages worth almost nine billion U.S. dollars are in arrears with the government owing over 20% of these. The government doesn't have the money to pay the wages it owes its workers and is months behind in many sectors. More and more people are falling below the poverty line in their earning power. To get money to operate, the government taxes everything that it sees that might have value, effectively shutting down the country's economic engine and effectively denying Russia the chance to realize its great potential of becoming a leading member of the world's affluent nations who have created their wealth by playing according to the rules of a market economy, one of the pillars of which is private ownership, including the private ownership of land.
Perhaps Russia has been cursed by having too many natural resources, allowing the Russians to get lazy and to rely on the "mining" of these resources for their country's wealth (and thus their previous ability to subsidize, with the sale of natural resources, a command economy that was ineffective at creating wealth by value adding) rather than on working to develop a value added economy such as has been done in Japan, South Korea, Taiwan and Singapore where there are few natural resources but where market economics have been allowed to flourish. Compare the recent success of these countries with the poor performance of resource rich countries such as Nigeria, Venezuela, Mexico, Saudi Arabia and Zaire. The Baltic country of Estonia has no natural resources, except its people who work in a developing market economy, and it is growing and performing economically better than the resource rich neighboring country of Russia whose economy is continuing to shrink.
In fact, in a study of 97 developing countries (reported in the Moscow Times recently) it was shown that over the two decades from 1971 to 1989 that a country's standard of living was often negatively correlated with its amount of natural resources. Jeffrey Sachs and Andrew Warner, both Harvard economists, found that not only did possessing natural riches not guarantee economic success; their possession actually predicted failure. There are notable exceptions such as the United States, Malaysia and Chile. It's not so much what you have that counts as the economic and political policies that you pursue that will attract investment and encourage hard work, such as openness to trade, investment in education, honesty in government and business and promoting a viable market-oriented economy where people have ownership rights and therefore ownership attitudes because they know that they will be rewarded for their good performance and punished economically for their failures.
Wealth is created when you develop a value added business environment. Wealth is mined when you extract and sell raw natural resources. The former is sustainable. The latter is not. Value adding requires long term investment and long term management attitudes. To accomplish this you need a politically stable government and an economically stable country. These are two of Russia's biggest needs.
Hopefully, Yeltsin, with his repaired heart, will be stronger and make the right moves to improve the macro-economic policy of Russia so that Russia is conducive to stability and attractive to long term investment. Russia needs to add the value themselves to their raw ingredients rather than to ship their bountiful resources out of the county only to transport them back at a "value added price" as finished products. The Russians object to all the large quantity of imports that are coming into their country, but until they are able to compete on the world market, they will have to put up with low incomes and the export of their natural unprocessed resources and the importation of finished goods, including agricultural products. Russia now imports over one-third of its agricultural products because it can't compete on world markets, meaning that the population can buy foreign food cheaper than buying food produced in Russia.
As we drove away from this collective farm I was thinking about the deplorable feeding situation that they were facing where they will run out of forage before the animals can return to pasture in the spring. I was of course thinking of how sad it was that these people didn't have the incentive to harvest, even by hand, the forage that they had already grown and that was ready for harvest on this collective farm. With salaries of only about $45 per month and these being paid late, it wouldn't take the harvest of much forage to add considerably to this wage, particularly when you consider the value of the milk that could have been produced if this lost forage could have been fed to the cows. One person could salvage enough forage for each day worked to more than cover his monthly salary. Labor in Russia is cheap in relation to the value of the lost forage, but no one cared because their short sighted thinking told them that , "It wasn't their problem!" They don't have an ownership mentality because they don't have true ownership.
The positive incentive of ownership is visible to all if they would only look around and perceive what they can see. As we left the farm I noticed a man walking with his bicycle along the side of the road carrying a big sack and picking up small quantities of hay that had fallen from a passing truck load of bulk hay. I thought, "This man undoubtedly has some animals that he owns and since he will personally benefit from gathering this hay and feeding it to his own private animals, he feels that it is worth it to go to this considerable effort to get forage for them, even it means carrying it back on his bicycle."
The natural human incentive to produce wealth when you own the factors of production and when you will personally benefit from the wealth that you create is obvious, even in Russia. You just need to look around. Collective farms fail while private dacha lots flourish. Why don't the Russians see this? Why do they keep deceiving themselves by thinking that it is natural for others to look after you and for you to look after others? This is counterfeit logic. People like to look after themselves. They know what their own needs are better than others do. And why don't they make appropriate changes to their economic structure to fire up the engine of wealth creation rather than sitting back and talking about the good old days, when in actuality, during the "good old days" the entire country of Russia went bankrupt, due in part, to the lack of positive incentives to work.
Jesus addresses this problem of lack of ownership in John 10 verses 12 and 13 when he says, "The hired hand, who is not a shepherd, and who does not own the sheep, sees the wolf coming, leaves the sheep, and runs away. The wolf seizes the sheep and scatters them. He does not care for the sheep, because he is a hired hand."
Do you remember the message of "The Little Red Hen"? "Who will help me to plant, till, harvest and mill my wheat into flour and help me to bake bread?", said the little Red Hen? "Not I!" shouted the multitudes. "Who will help me eat it?" "We will!" they answered, "even if we have to confiscate it to get it!". So, since the little Red Hen could not benefit from her own hard work, she laid down her tools and no longer worked to raise wheat, make flour and to bake bread - and the multitudes went hungry.
The moral of this story is that under the conditions of "To each according to his needs; from each according to his abilities", people don't have an incentive to work, not even the little Red Hen, so the creation of wealth languishes and people make believe that they enjoy being equal in their poverty. For a country to have a standard of living above the poverty line, people need to know that they will receive the benefit from their own labors. Nothing does this like private ownership, including the private ownership of land. They also need to be able to work in an economic environment where there is competition throughout from suppliers to producers to customers and where prices are determined freely in the market place. In addition, a profit incentive should prevail in the decision making process over a production incentive if you expect to have an efficient allocation of the factors of production and the maximum production of wealth and thus the highest standard of living possible for a civilization.
Russia needs to make some major changes if they expect to join free market economies as an equal partner. There is no doubt that Russia is a great country. There is also no doubt that it is a country rich in resources but poor in adding value to these resources because of extreme inefficiency of production, processing and marketing. As a result Russia has a low standard of living. The many Western humanitarian aid programs now working in Russia are having a positive effect on Russia's conversion to a viable market economy. The target audience is gradually changing from the old command economy philosophy to a market economy mentality but this is going to take years, if not generations, to accomplish. These are critical times for Russia. It is a privilege for me to be working here during these exciting times as the resident coordinator for one of the Western humanitarian aid programs. While progress can be expected to be uneven, I expect, in the future, to read about more positive economic, political and social changes occurring in Russia than hearing about negative changes. Let us continue to work hard and effectively to make this positive forecast for Russia the new "Russian reality".