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Issues in privatization of agricultural enterprises in Latvia and possible ways of solution

A.Miglavs report in Finnish-Baltic Joint Seminar, Vilnius, Lithuania, published in 'State Regulation of Agricultiral Production' (1992) Agricultural Economics Research Institute, Finnland, ISBN 952-9538-24-3, ISSN 0788-5393, pages 77-82 Oriģinālajā salikumā lasāms PDF fails pielikumā

ISSUES IN PRIVATIZATION OF AGRICULTURAL 
ENTERPRISES IN LATVIA AND POSSIBLE WAYS OF 
SOLUTION 
A. MIGLAVS 
Scientific Research Institute of Agricultural Economics 
Riga, Latvia 
Any economic incentives for regulating production serve as a means for affecting the 
producer, the man envolved in production. The longer the chain of production management, 
the weaker it' s influence on the producer, and the stronger should be the means for 
affecting him. In this aspect individual farms and state farms are direct opposites in 
agriculture. 
In the period of transition to market economy one of the main tasks for the government 
is to establish a class of producers who would readily respond to market mechanism. Here 
are some figures to illustrate this numbers of labourers and farms in average: 
1920 1935 1950 1970 1988 
Number of labourers 730 470 838 100 310 560 242 600 240 800 
Number of farms 192 400 237 400 1 851 925 578 
Labourers per farm 3,79 3,53 168 262 416 
As we can see from this data, the total number of farms has decreased considerably with 
the growth of socialism, and their acreage has increased. This process was based on 
elimination of private ownership and led to exclusive employment of hired labour in 
agriculture. Ali this destroyed the basis of market mechanism, for it works efficiently only 
in the circumstances of private ownership and personal motivation based on it. 
From the above said, it is necessary to privatize agricultural enterprises due to the 
following reasons: 
- introducing economic methods of maintenance in production which proved to be 
impossible without changes in ownership (chronologically it was the primary reason); 
revival of individual farms; 
- decentralization of production maintenance and production itself; 
implementation of an ali- comprising agrarian reform which pursues the objectives 
of reviving individual farmers mode of production. 
The work on privatization of agricultural enterprises in Latvia started in 1989 in some 
of the collective farms. Its primary direction was restricted only to the improvement of the 
existing collective- farm structure. It was due to the fact that the new economic legislation 
which should acknowledge private entrepreneurship, had not been worked out by then, and 
actually nobody offered special incentives to develop this process. As a result of this by 
the beginning of 1989 there were certain changes in this aspect only in about 40 collective farms. However, none of these farms changed the type of entrepreneurship. Only after the 
Law "On Entrepreneurial Activities" was adopted there appeared the necessity for an 
ultimate decision as to the fate of agricultural enterprises, because the new law did not 
acknowledge the collective farms as a type of entrepreneurial activity, which would 
correspond to the present law. At the same time the Statutes of Collective farms had to be 
taken into account, and they stated that the property of a collective farm is a joint property 
of ali its members. 
Alongside with this an ali comprising agrarian reform began, which consists of reform 
of economic relations, landreform and denationalization processes etc. A number of 
questions conceming collective farms and agricultural enterprises arose. Some of them 
have been answered by the Law "On Privatization of Agricultural Enterprises and 
Collective Fisheries" adopted by the Supreme Council on June 21, 1991, and in subsequent 
legislative acts. Let us discuss some of them. 
Ts it only the collective farms that are subject to privatization, or does it concern ali 
the agricultural enterprises, including state agricultural enterprises? II the state enterprises 
(state farms), according to the present legislation, are the property of the whole nation, the 
collective farms already are a common property of collective farmers. The only task is to 
find out who are the owners and how large is each owner' s share. Actually ali the state 
farms are the former collective farms, which under the pressure of the previous agricultural 
policy were forced to transform themselves into state enterprises. This is the reason why 
it was decided to privatize ali the agricultural enterprises in a uniform way. The only 
exception is specialized state enterprises, where the process of privatization will have 
specific features. 
Will the above mentioned document be the only one with the regard to privatization 
of agricultural enterprises? The processes of denationalization and ownership restoration 
are in progress alongside with to process of ali comprising privatization. Therefore it was 
agreed upon that the property of disputable ownership would not be subject to general 
privatization of collective and state farms. As to the rest of the property this will be the 
main document. This fact has largely influenced the contents of the law, which reflects 
both the privatization of the assets of an enterprise as well as of production itself. 
Was the act of collectivization in 1948-49 a lawful one? Are then the collective farms 
legal? The decision of the Supreme Council of the Latvian Republic "On Agrarian Reform 
in the Latvian Republic" (adopted on June 13, 1990) acknowledges that only the methods 
of collectivization have been illegal. The law on privatization therefore is based on the 
principle that the collective farmer' s ownership of the collective farm' s property should 
be taken into consideration. Yet, a uniform order set as to the calculation of shares for each 
individual, which should be in proportion with the property they have invested into the 
collective farm this is envisaged to be a kind of compensation for their sufferings. In the 
further process of privatization these shares should be used in compliance with the chosen 
way of privatization (this will be discussed further). 
Should the agricultural enterprises be privatized as separate objects? Perhaps they 
should be joined into an integrate state property, which should be subsequently distributed 
in such a way that everybody has equal conditions for starting entrepreneurial activity? 
The collective farm property is still the property of its members. Therefore the above 
suggested redistribution would only be possible after the current nationalization, which 
is absolutely inadmissible. Besides, it should be taken into account that collective farms worked with diverse results. Redistribution would only be the current levelling for the 
benefit of those who have worked less and worse. That is why it was decided to consider 
the enterprise, as an integral unit of assets and individuals claiming for ownership, to be 
the subject of privatization. 
Ts it possible to privatize collective farms and state farms according to the same 
pattem, without taking into account the discrepancies in the types of ownership? As most 
of the state farms actually are forcefully tramsformed into impoverished collective farms, 
it was decided to privatize the sate farms under the same conditions as collective farms. 
Yet, there arose some difficulties, because there is no category of membership in the state 
farms. Therefore a paragraph was introduced in the law "On Privatization of Agricultural 
Enterprises", which explains how to equalize state farms to collective farms conceming 
both the assets and the individuals. The essence of this paragraph actually is denationalization 
of state property in the countryside. 
How is it possible to privatize enterprises which throughout decades have been 
established as complete business units where most of the structural units are interrelated? 
As in each separate case there is only one enterprise and many owners, it is impossible to 
distribute property among them in such a way that production process is retained and 
ownership preserved. Therefore it was decided to determine ideal property shares for each 
candidate and afterwards to decide what to do with them. 
Who will have the legal rights and responsibilities in the privatization process? 
Determining of the capital shares by itself does not yet mean anything, because they only 
represent ideal property parts which actually cannot be divided into units that small. These 
shares only entitle their owner to the rights to use them. This becomes possible only if there 
exists a certain mechanism. There should be a subject who would guarantee the 
implementation of the rights. The former collective and state farms cannot play the role 
of this subject, because their statutes and activities are based on indivisible property. 
From the above said, as a result of privatization, there should appear something new 
instead of the former collective farms. The only possible way out is to establish business 
companies or a large number of small enterprises. However, the former agricultural 
enterprises as business units had partners -consumers, suppliers, banks. This is in 
connection with the contracts, outstanding bills and credits. It is clear that the business 
partners should not been put into jeopardy during the privatization of an enterprise, 
otherwise a chain reaction of bankruptcies might start. Only two possible ways for dealing 
with this issue are prescribed by the laws of the Latvian Rebpublic: 
- The way of reorganization of the existing subject with distribution of ali rights and 
liabilities among the acquirers of the former enterprise 
- The way of liquidation, when all the mutual liabilities are anulled, however, in this 
case, as a rule, production is liquidated, too. 
These two ways serve as a basis for the privatization of collective and state farms. 
Are ali the agricultural enterprises obliged to change their status according to the 
pattern described by the law? Or does it depend on the decision of individuals working in 
the enterprise, admitting that in some instances the enterprise would be liquidated? On the 
one hand, there can hardly be one universal recipe for ali the 600 enterprises, on the other 
hand the process envolves ali the collective farms and plenty of people whose property was 
invested into collective farm, as well as creditors. There should be some uniform approach. 
This is the reason why the present law comprises only the guiding principles for the process of privatization should be carried out in each particular enterprise. This process could be 
divided in two stages: 
calculation of total assets of the enterprise by July 1, 1991, and determining the 
individuals who are entitled to capital shares, as well calculation of these shares. It 
should be stressed that at this stage only the rights to obtain shares are clarified, and 
not concrete objects. 
taking decisions as to the conception and transformation of the former types of 
enterprises into new ones they should be taken by the shareholders. 
At this stage it should be decided whether statutory company would be formed on the basis 
of the former collective farms. In this case the statutes of the new enterprise will rule the 
shareholder' s rights as to trading with his shares. The type of production does not change 
it remains public at this stage. 
If the former collective farm is going to be liquidated, each owner gets his actual share 
either in cash (liquidation quota) or in kind (the acquired assets). In the latter case the owner 
is free to make this choice to join another company or not to do that. It should be remainded 
that liquidation is carried out by selling the assets only for cash. 
What criteria should be applied for calculating the shares? Three aspects should have 
been discussed; land, property investments and labour investments. Yet, land has not been 
acknowledged as private property up to now and for the time being cannot be traded. 
Therefore its price has not been set. There are some other aspects, too, that should be 
considered. Due to ali this, land is left out in the process of calculation of shares. There 
is hope that land issues, including land ownership, will be solved by the land reform. So 
only the two other aspects have been left; labour investments and movables & real estate. 
What type of new enterprise should be formed if the way of gradual transformation 
has been chosen? The law "On Entrepreneurial Activity" presents an exhaustive list of 
types of entrepreneurial activity, and it should be complied with. Therefore, to transform 
the former collective farms, as a rule, one type of statutory companies is chosen; 
shareholding company, a limited liability company, a joint- stock company. The problem 
is that the objective of ali the three is to preserve their integrity. But in the process of 
privatization the decentralization and privatization of production is extremely essential, 
and the above mentioned companies may serve only as a means of meeting the interests 
of separate owners. Therefore the law contains the mies which encourage the splitting of 
the present large agricultural enterprises. At the same time there is an attempt to preserve 
the producing capacities of the assets. There is a mechanism for keeping a permanent set 
of plant and machinery in enterprises, the so called inventory. 
How to create an entrepreneur? The initial privatization, the results of which were 
joint stock or limited liability companies was not a solution of the problem. Production 
itself remained centralized where in fact ali the workers are hired labour, though formally 
they are owners at the same time. It is no secret that the psychology of a hired worker differs 
tremendously from that of an entrepreneur, and it does not necessarily mean that a good 
worker would make a good entrepreneur. One cannot do anything by force here. 
This is why there is a principle in the law which prevents the possibility to force 
someone to become an entrepreneur, but an individual should be given the opportunity to 
become an independent entrepreneur. In order to ensure this a special mechanism has been 
created which should be obeyed by ali privatized collective and state farms irrespective of the type of business company chosen. This mechanism comprises: 
1) The so-called inventory of the assets of an enterprise, which includes the whole set of 
property according to the production objects with the basis price of this set. The inventory 
serves for two purposes: 
each member of the company is entitled to choose any item from the inventory and 
demand the company to sell it to him, and he can buy it for his capital shares 
- each of the items can be obtained only as a whole set. 
This is the way how economic prerequisites for reorganization of production and 
encouraging entrepreneurship are created. 
2) The regulations for obtaining the chosen object. The regulations are based on: 
voluntary choice (nobody has the right to force somebody else to privatize an object); 
publicity (ali the members should be notified if somebody has an intention to privatize 
one or another object) 
- certainty (the company itself has no right to refuse the privatization of an object). Only 
another member with the same intentions can put obstacles in the process of obtaining 
an object. 
Besides the above mentioned and shortly discussed issues of privatization of agricultural 
enterprises which need solution, there are plenty of other ones which need a solution, but 
this would be a much more extensive topic.