Restart of land market or "economic nonsense"?

Author : Dmytro Livch

Source :

The government promises that foreigners and businesses will not be able to buy Ukrainian land. Is it worth to introduse such restrictions in Ukraine?
23:27, 10 April 2017

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Prime Minister Volodymyr Groysman said that Ukraine should focus on such model of the land market, where only individuals with Ukrainian passport may become buyers.

In such way, he believes, we can protect landowners and land from "large holdings or foreigners who might come to Ukraine and buy land." However, this decision may not work in favor of business owners - it just will curb demand and affect pricing.

So why the foreign investment in our agriculture is so important for economic growth?

To what extent the proposed by prime minister measures fall under the concept of "liberalization" - is a dubious question.

Regarding the words of Groysman, people are worried by the fact that after 15 years of violations of landowners’ constitutional rights, authorities began to position themselves as defenders of villagers. In terms of officials, the moratorium was and remains a remedy, not a factor of disadvantage for industry.

But in fact it would be easy to start with the principle of supply and demand. Otherwise, we simply ignore a series of logical questions.

How many times will be reduced demand due to a direct ban of the purchase of agricultural land by legal entities and foreigners and how it will decline due to additional restrictions?

How can we maximize the value of the asset in the hands of ordinary landowner, not allowing the market to develop properly? How to improve the level of welfare in rural areas without stimulating investment in infrastructure and industries related to agriculture?

The answer to this question is also very simple and logical. The land prices will fall directly proportional to the decrease in demand. No need to be an economic genius to understand this.

This hypothesis has been confirmed by the experience of over 60 countries, which at one time had to think about land reform. For example, let’s compare the price of land in countries where foreign ownership is limited to those in which the market is open.

Among the 18 states where the government just decided to completely restrict the market for foreign capital there are former Soviet republics (Moldova, Kazakhstan, Russia, Armenia, Kyrgyzstan), Balkan countries (Albania, Serbia, Bosnia and Herzegovina), and several countries in Africa and Middle East. Average land price there is 3,833 dollars per hectare, and rental rate - 205 dollars per hectare.

Related: European vision of its future and place of Ukraine: Five scenarios

At the same time, the majority of EU countries do not focus on the nationality of the buyer. Their opinion is also shared by Japan, the US, Uruguay, the Dominican Republic and Cameroon. As a result, the average price per hectare is up to 19,336 dollars here, and the average rental rate – 360 dollars.

Moreover, the price of land is not only associated with a particular region but directly correlated with the level of market openness.

Here, for example, experience of close to Ukraine by historical and economic past, neighboring Romania shows that full liberalization of land markets led to annual growth in the average price of agricultural land at 37.5% in recent years.

Of the analyzed countries we can also distinguish those where foreign capital restrictions existed, however temporarily - Czech Republic, Lithuania and Bulgaria. Later these countries opened market for foreigners.

Lithuania. After the collapse of the Soviet Union, Lithuania, like most former Soviet republics, experienced an economic crisis. Market opening and liberalization have led to rapid growth in land prices in the country. The cost has tripled - from 340 dollars per hectare in 1991 to 1,100 in 2012.

Czech Republic. After the Velvet Revolution Czech formally went the other way, than Ukraine - fully used farm inheritance, but the development of the farming class came to almost similar results - private family farms did not become the most common form for agribusiness. However, this did not prevent the Czech Republic open the market to foreigners in 2011. Added value in agriculture after this decision increased to 1.9% (for comparison - in 2010 the industry experienced a decline - 16.3%).

On the examples of these countries we see that the communist prejudices can be overcomed without losing national wealth, but making national economy stronger.

Let’s add to this situation the features of our mentality and imagine the following scene. Reform is carried out, the market is open, 7 million owners got right to dispose of their own property.

The vast majority of them are the poor pensioners. For them, the sale of land is a rare opportunity to earn money. In this situation, the presence of reach buyers is not enough for the price to increase appropriately.

And then what? Then we will put the minimum required price on paper, but pay according to personal agreement and avoid paying the full amount of taxes. Some customers do not want to engage in such fraud, which will also negatively affect demand and, consequently, the real price of land.

The market, which exists only for individuals with Ukrainian citizenship, has a risk of using roundabout methods and "shady schemes". And this rule will not protect Ukrainian market from foreign capital and entities.

As a result, a natural question arises: in whose interests the government operates?

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