A genuine proposal for formalization of rural household farms in Ukraine or its opposite?

There was a really interesting article recently in Zerkalo Nedeli, a highbrow newspaper in Ukraine, about a proposal to formalize those small-scale household farms in Ukraine that are really operating as commercial farms. There are no numbers on how many households this is. It is certainly not a majority of rural households, but it is an important minority. The article (here in Russian) was written by Elena Borodina and Igor Prokopa, two agricultural economists who frequently write illuminating articles about Ukrainian agriculture for ZN.

This  topic is close to my research, so in this blog post, I will summarize the article. Basically, the proposed law – it is actually proposed changes to the law on fermeri (family farmers) – would allow physical persons who farm relatively small (for Ukraine) plots of land to register as subjects of entrepreneurial activities. In essence this would create a new farm category – Physical Person Entrepreneur (FLP to use the Russian acronym) and the goal is that it would encourage a rather large group of active, commercial farmers who have anywhere from a couple of thousand square meters to 10 ha (or in some cases more) to come out from the informal economy. A common vernacular name for such farmers is odnoosibniki, which means “single person” in Ukrainian and generally refers to a person who cultivates by themselves the 4 to 5 ha of land they received in the privatization of the local collective farm. Many odnoosibniki also cultivate the land of relatives who received land allotments during the privatization reforms. Even people who did not receive any land in collective farm privatization or people who lease out their land to another farm, can still have access to up to 2 ha somewhere, often close to the home, that they can cultivate very intensively.

The incentive for such people to register as subjects of entrepreneurial activity is that they would be able to participate in state support programs intended for family farmers and also there is a promise of a special social insurance program. The costs however – as Borodina and Prokopa detail – appears to be very high, perhaps too high. The proposed changes to the law envisage a rather cumbersome registration process, requiring that these farmers, many of whom would not have a car, travel 10 to 40 km to the local district center. It would further entail paying pension fund taxes, registration with the tax authorities, and the obligation to regularly answer statistical surveys from district statistical departments.

Borodina and Prokopa estimate that a household with 2 ha and 3 cows, which would have an estimated annual income of 30,000 UAH (about 1826 Euro in today’s crashing exchange rates), would go from paying 40-50 UAH in land tax today to somewhere between 300 and 900 UAH in annual tax, plus around 400 UAH a month in social taxes, plus still VAT. Then there is the amount of time one would have to spend. Private households wishing to register as FLP would have to travel, not just once, but regularly to the district center to pay taxes and submit reports on their activities.

At the same time as this possibility is now being proposed, there is another proposed law change that would forbid households from selling surplus produce on markets in an attempt to push every household that is to some extent commercial to be in the formal economy.

Borodina and Prokopa argue that it is important to try to formalize the activities of the active rural households engaged in commercial agriculture, but that these proposals will do the opposite – push active farming households deeper into the shadows.

Instead they argue that farms in the informal sphere should be formalized as family farmers without having to register as a legal person (or a FLP). One should recognize, they argue, that farming is a special activity and should not face the same demands placed on other economic actors. Second, the registration procedures and accounting obligations for family farmers should be greatly simplified and the tax obligation lightened. Finally, reforming family farming should only take place within the context of a comprehensive reformation of agrarian policy with respect to all categories of farms, a reformation that would define and accept family farming as an essential element in ensuring the functioning of the agro-food sector.   

This was a good article and I recommend those who can read Russian to read Borodina’s and Prokopa’s other material on ZN.