Promoting more efficient agriculture: legal form of Slovakian farms

What can be done to encourage agricultural enterprises to become more productive? This column reports research showing that a shift of legal form from cooperatives to business companies in Slovakia has driven a significant improvement in performance. While climatic and market conditions are clearly of central importance for farm outcomes, the concentration of ownership and responsibility in firms leads to more effective management with better results.

The transformation from a centrally planned to market economy was accompanied by the initial decline of industrial production and GDP in virtually all countries of Central and Eastern Europe. In entering a new market environment after 1990, firms in the region embarked on a journey through complex structural, economic and social changes, which were reflected in measurable improvements in only some aspects of their technical performance and competitiveness. New forms of business emerged, the number of firms increased and the average concentration of industry fell.

In Slovakia, for example, large-scale state farms and agricultural cooperatives were gradually replaced by limited liability and joint stock companies, each encompassing smaller areas of land and with smaller numbers of staff. Our research explores the impact of this change of legal form on the economic performance of agricultural enterprises.

While natural resources, climatic conditions and the other key factors of production (labour and capital) clearly play an important role in agricultural efficiency, so too does a series of less tangible inputs that are not typically given much emphasis in agriculture. These include imagination, ambition, willingness to take risks, better organizational and management skills, patience and a sense of innovation. One further non-production-related determinant is legal form.

We find that changing legal form has had a significant impact on differences in the performance of agricultural enterprises. In the early years of the transformation from a centrally planned to market economy, persistent differences in economic results were caused by the impact of the formation of business companies. These mainly originated from taking over the creditworthy parts of the property of the former agricultural cooperatives without adequately taking over their liabilities to banks and other business partners.

But in our view, the transformation process, with its negative consequences, does not represent the key determinant of the persistent differences in performance among agricultural enterprises. From our perspective, legal form is the key factor because in the case of business companies, it allows concentration of ownership and responsibility, which in turn creates more efficient management and a higher level of motivation.

While economic results are generally determined by the most favourable climatic conditions during the year and the situation in markets for agricultural output, the effective management of an agricultural enterprise even in worse weather conditions can be an inspiration to other local companies. If effective elements of those management practices can be applied to other enterprises operating in better climatic and market conditions, they can contribute to improved economic performance of the individual enterprises as well as agriculture as a whole.

We find that agricultural cooperatives fail to achieve the same results as business companies, not only in absolute terms but also in profit margins. In none of the years that we observed did the share of profit-making cooperatives (in the total number of cooperatives) exceed the share of profit-making business companies (in the total number of business companies).

We can debate whether it is the form of management that so greatly determines the diversity of economic performance of the enterprises we study. The better economic performance of companies may be determined not only by different approaches to corporate management and risk management, but also by the creation of more effective decision-making structures. It may also be due to their better starting position in the past (compared with the cooperatives), as well as better training and educational programs.