Prof. Dr. Stephan von Cramon-Taubadel/Dr. Ricardo Giucci Kyiv, 10 October 2011

1. Turning Ukrainian Agriculture into an Engine of Growth A Strategy for the Development of the Grains and Oilseeds Sector Commissioned by the European Business Association (EBA) and the American Chamber of Commerce in Ukraine (ACC) Prof. Dr. Stephan von Cramon-Taubadel/Dr. Ricardo Giucci Kyiv, 10 October 2011

2. Contents I. Agriculture in Ukraine: Potential vs. Reality II. The Elements of an Agricultural Strategy III. Outlook Contacts

3. I. Agriculture: Potential vs. Reality Today: Agriculture plays an important role in Ukraine • 8% of GDP and 5.5% of employment (22% and 10% if up- and downstream industries included) But: Agriculture’s contribution could be much larger Example: If Ukraine increased crop yields by 30% (thus catching up with Poland) • Per year 13 m more tons of crop worth USD 1.9 bn • Additional GDP-growth: 4.4% in 5 years and 12.5% in 10 years (provided 30% productivity increase in entire agriculture) • Additional income of rural households: 11.2% (5 years), 27% (10 years), provided 30% productivity increase in entire agriculture Conclusion: Ukrainian agriculture could be an engine of growth for the entire economy, and drive poverty reduction in rural areas

4. How to unlock this potential? Key questions for policy makers in Ukraine • What has to be done to increase productivity? • How can agriculture become an engine of growth? Answer • Implement appropriate policies Here • We present a comprehensive and balanced strategy for agricultural development • International best practice used as a benchmark, while taking into account Ukrainian reality • Focus of the strategy: The grain and oilseed sector

5. II. Elements of the Strategy The strategy consists of 7 elements 1. Liberal trade and agricultural market policy 2. Harmonisation with international standards 3. Infrastructure and marketing systems 4. A modern/efficient system for taxing agriculture 5. Agricultural finance 6. Land market 7. Agricultural education and research To underpin these elements • Social policy measures to protect poor consumers

6. 1. Trade Policy Current policy • If prices go up strongly, then implementation of export restrictions such as quotas and taxes (see Fig. 3 on p. 13) • 4 such episodes in the last 6 years! The (official) purpose of export restrictions • Protect the poor from food price inflation Shortcomings of this policy • Short term: Strong negative financial impact on grain producers • Long term: Huge uncertainty for investments in grain production • Result: Slow growth of yields and productivity in Ukraine

7. 1. Trade Policy (cont’d. Besides, food price inflation argument flawed • Link between prices of grains/oilseeds and food weaker than assumed • Empirical research for UKR: 10% increase in grain prices → 3.5% increase in related food prices (see Box 1 on p. 11) • For pork: Almost no impact, because Ukraine is a net importer • Furthermore: Extremely poorly targeted measure, since everyone (including the rich) enjoys the (weak) benefits Conclusions • Interventions have provided weak, ill-targeted relief to consumers at the expense of major losses for producers and agricultural development • Thus: Liberal trade policy should replace interventions Recommendation • Commitment not to intervene for the next 5 years

8. 2. International Standards Current situation • Some appropriate standards in place; important for consumer protection • But also many outdated standards, and overlapping • Result: high costs for exporters and disruptions of trade (see Box 2 on p. 16) Recommendations • Harmonisation of legal base with EU Acquis • Harmonisation with international standards; elimination of Soviet-era standards • Continuation of reform of institutional framework • Establish procedures for efficient implementation of market surveillance law • Implementation of HACCP and traceability in the food chain

9. 3. Infrastructure and Marketing Current situation • Marketing costs in Ukraine very high • Grain producers in Ukraine receive around 60% of world market price, while producers in France receive 90% (see Fig. 4 on p. 18) • Thus, grain producers lose USD 85 per ton and USD 3.4 bn in revenues Main reasons for high costs • Poor and expensive infrastructure • High cost of certification (see ‘Standards’) • Export tax and no VAT export reimbursement Recommendations • Elimination of export tax and installment of VAT export reimbursement • Implementation public-private partnerships (PPP) in railway sector • Permit challenge of certification procedures – onus on the government to prove that procedures are justified

10. 4. Taxing Agriculture • Current situation • System of agricultural taxation in Ukraine is inefficient and inequitable • Fixed Agricultural Tax (FAT) very low, leaves farm profits untaxed • VAT regime (privileges vs. no export VAT refunds) contradictory • Implications • Agriculture (8% of GDP) contributes 1-1.2% to consolidated fiscal revenues, receives 3.1-3.4% of expenditures • Elimination of VAT privileges and imposition of a 25% profit tax would reduce consolidated fiscal deficit from 8.7 to 6.9% of GDP • Recommendations • Implementation of a ‘normal’ system of taxation of agricultural profits/incomes as of January 1, 2014 • Reinstatement of VAT export refunds by same date coupled with thorough reform of VAT administration

11. 5. Agricultural Finance Current situation • Provision of loans to agriculture in Ukraine is low • Agriculture’s share in corporate lending is smaller than its share in GVA! (see Fig. 5 on p. 24) Why do agricultural enterprises receive so little finance? • Significant problems with contract enforcement and repossession of collateral – legal environment • Repeated government intervention boosts risk of lending considerably • Lack of creditworthy borrowers with proven track records, professional bookkeeping and business plans, and sufficient collateral Recommendations • Efficient, impartial contract enforcement • Mandatory implementation of professional bookkeeping on farm enterprises • Free grain and oilseed producers from strict NBU restrictions on FX loans

12. 6. Land Market Current situation • Provisions for lifting the moratorium on purchase and sale of agricultural land in the Draft Law “On the Land Market” • Expectations that this will stimulate agricultural development However • A newly liberalized land market will take time to develop and generate the expected benefits (e.g. collateral for lending to agriculture) • Benefits will only materialize if necessary institutional basis ensures transparency and competition Recommendations • Change Draft Law to eliminate all pre-emptive purchase rights and permit foreigners and legal entities to participate • Fully implement unified cadastre system prior to lifting the moratorium

13. 7. Education and Research • Current situation • Competitive agriculture depends critically on human capital • Ukraine’s agricultural education and research system is failing to generate the necessary trained individuals, from apprentices to PhDs • Shortcomings of the current education and research system • Well-funded, but hierarchical, with poor organization and poor incentives • Divide between teaching and research • Very low international profile (see Box 3 on p. 30) • Recommendations • Expand and support existing international exchange programs, set up a competitive and transparent system of scholarships for study abroad • Competitive international staff selection procedures and salaries • Establish a new Ukrainian University of Agriculture

14. Social policy to Support the Strategy Crucial: Our strategy hinges on a liberal trade and market policy that would allow high prices to stimulate agricultural growth Legitimate concern: This could have a negative impact on the poor in Ukraine, and heighten social tensions Social tensions: Could jeopardise the strategy’s implementation How to avoid hardship and social tensions? Through a well-designed, targeted and affordable compensation scheme It is possible to help the poor deal with food price inflation without sacrificing agricultural incentives and growth!

15. Social policy (cont’d) Recommendations • Compensation scheme should be linked to the existing guarantee minimum income (GMI) program (no new program!) • Form of link: Fixed top-up for GMI-eligible households as compensation for (expected) higher food prices related to grain and oilseeds • Adjustment of top-up once a year (in the context of budget formulation) • Preliminary estimates: Fiscal cost not very high and thus affordable • Example: Compensation for a 50% increase of grain prices would cost UAH 178 m, equivalent to 0.06% of consolidated fiscal expenditures • Possible: Extension of GMI program to cover a larger share of population (as of 2010 only 1.5% of households) at correspondingly higher fiscal costs

16. III. Outlook Agricultural policy makers world-wide face the same dilemma • High food prices are good for producers • But they are bad for consumers, especially for the poor Key question for policy makers • How to strike a balance between producer and consumer interests? Ukrainian answer in recent years • Export restrictions, market intervention, trade disruption • As shown: A highly inefficient solution to the dilemma

17. III. Outlook (cont’d) Recommendation • Commit to a liberal trade policy – allow high prices to stimulate agricultural growth • Implement complementary reforms in the areas of standards, infrastructure, finance, the land market, taxation and education/research • Employ targeted social policy measures – provide the needy with aid to deal with high prices Ukrainian agriculture does not have to settle for foul compromises and second-rate policies. The time has come for an ambitious policy that unlocks agriculture’s potential

18. Contacts Prof. Dr. Stephan von Cramon-Taubadel scramon@gwdg.de Dr. Ricardo Giucci giucci@berlin-economics.com BE Berlin Economics GmbH Schillerstr. 59, D-10627 Berlin Tel: +49 30 / 20 61 34 64 0 Fax: +49 30 / 20 61 34 64 9