Agroholdings and Agricultural Science in Ukraine: Uneasy Bedfellows

Despite their generally successful business performance, agroholdings often attract public criticism, which is often voiced by the officials of the National Academy of Agricultural Sciences of Ukraine.

depositphotos / slavastock

Authors:

Dr. Taras Gagalyuk, Leibniz Institute of Agricultural Development in Transition Economies, Prof. Dr. Vladislav Valentinov, Leibniz Institute of Agricultural Development in Transition Economies, Dr. Liudmila Yefimenko, Tavria State Agrotechnological University

We suspect that some of this criticism could be motivated by the emerging rivalry between the Academy and agroholdings along four dimensions: business performance, business transparency, stakeholder engagement, and the quality of scientific research. If this argument is correct, then at least some of the public image problems of agroholdings present a discursive artifact rather than genuine legitimacy deficit.

At an accelerating rate, agroholdings are transforming the face of Ukrainian agriculture. Producing nearly one fourth of the country’s gross agricultural output and operating around 18% of total farmland, they stand for industrialization, innovation, productivity, and market orientation. A typical agroholding is represented by a mother company that owns a majority stake in it and manages dozens and hundreds of commercial farms. In this context, what agroholdings are probably best known for, in Ukraine as well as in other transition countries, is their enormous size. The largest 85 agroholdings together control around 30% of land used by agricultural enterprises. 

The rise of agroholdings has been due to various factors, ranging from market imperfections and the inflow of capital from foreign agriculture to the growing global need for food and fiber and extensive support from policymakers including preferential taxation, subsidies and moratorium on land sales that enabled accumulation of huge areas of farmland through the lease instrument. The public image of agroholdings, however, is controversial. They have not been free of legitimacy problems and have been accordingly attacked on many fronts. 

In Ukraine, some of the most vocal stakeholders raising critical concerns about agroholdings come from the institutionalized agricultural science which is prominently represented by individual representatives and institutions of the National Academy of Agricultural Sciences.

From the business ethics perspective, it deserves noting that the problems of public image are not unique to any specific type of business. An eminent business ethics scholar remarked that in the Western hemisphere, “during much of the twentieth century, business and society have existed in a state of tension and conflict. From a societal point of view, business is frequently believed to have exercised its power and influence to the detriment of particular groups and society at large.” 

Moreover, business-society tensions which are apparently typical to the Western world seem to take particularly dramatic forms in agriculture. Even “corporate social responsibility (CSR) initiatives, originally seeking to reconnect agriculture and society, frequently provoke debate, conflict, and protests.” These problems can be traced back to “the moral complexity of agriculture”, i.e., the tendency of the legitimate moral standpoints of agricultural stakeholders “to proliferate without the realistic prospect of a consensus”. There is little room for doubt that the phenomena of business-society tensions and of the moral complexity make a great deal of common sense about the public image problems of the Ukrainian agroholdings. Yet, the institutional context of Ukraine is markedly unique and adds a new layer of complexity to the business ethics of agroholdings. This context can be characterized in terms of turbulence that pertains not merely to the dynamics of the market environment but rather to the very institutional foundations of the markets in which agroholdings operate. 

Agroholdings emerged as a response to weak institutions

Turbulence can be given many definitions. Strategic management scholars interpret it in terms of changing components of a firm’s environment or in terms of difficult-to-predict volatilities and discontinuities. Referring to the Ukrainian transitional context, turbulence involves the diminished role of the dominant formal institutions, including the so-called “function systems”. 

Niklas Luhmann, a luminary of contemporary sociological thought, considered the modern Western society to be functionally differentiated, i.e., decomposable into function systems such as the economy, politics, law, science, education, health care, and several others.

The rise of agroholdings can be generally explained in terms of development gaps in the society’s function systems, that is the economy, law, and politics. These gaps present a manifestation of the institutional turbulence as a salient characteristic of the Ukrainian institutional context. 

Agroholdings are said to emerge to fill the voids engendered by the institutional turbulence, and in that sense can be considered to be artifacts of the specific institutional environment.

This argument appears plausible but curiously incomplete. According to Luhmann’s vision of functional differentiation, a major function system of a modern society is science. If the institutional turbulence entails the diminished role of the function systems, this must hold for the science system as well, an implication which seems to be well supported by the evolution of the institutionalized agricultural science, including the National Academy of Agricultural Sciences, since the disintegration of the Soviet Union. 

Problems of the National Academy of Agricultural Sciences

The decline of the quality of agricultural research and education in Ukraine over the last decades has been well documented. In light of these trends, Western experts identified the need for reforming the National Academy of Agricultural Sciences which has suffered from the deteriorating resource base and considerable isolation from the international scientific community. 

The system of agricultural research in Ukraine has been shown to suffer from questionable management practices, insufficient incentive systems, outdated research infrastructure and, as a result, low performance in terms of both fulfilling the needs of the real sector of the economy and publishing in internationally recognized journals/participating in international scientific conferences. 

Yet, whereas many vital resources of the Academy have been dwindling, one crucial capacity remained largely intact. This is the capacity to voice critical concerns in Ukrainian mass and social media and scientific journals about the emerging development trends in agriculture, agribusiness, and agricultural science in Ukraine, and thereby to influence public opinion.

New development trends always generate winners and losers while the persistent institutional turbulence in Ukraine may even further widen the gulf between the winning and losing sides. 

In this context, one might speculate that the critical nature of the concerns expressed by the Academy could be attributed to the fact that actors like the Academy turn out to be on the losing side of the turbulence. At the same time, agroholdings arose as a result of the same turbulent environment and seem to be on its winning side. It might be the case that the critical concerns raised by the officials of the Academy, whether with regard to agroholdings or other issues, simply reflect their frustration by, and protest against, the ongoing dismantling of what used to be an eminent and prestigious institution in the past. While this might explain a part of the negative rhetoric of the Academy officials, one may argue that this rhetoric can be increasingly attributed to a particularly novel relationship between the Academy and agroholdings. 

NAASU and agroholdings: four battlefields

This relationship is rivalry. In the course of their ascendance, agroholdings have developed competence in several areas which likewise reflect the dimensions of the performance of the Academy. Moreover, as the beneficiaries of institutional turbulence, they have apparently come to outperform the Academy. 

The first of these areas is business performance. With regard to this area, direct comparisons between agroholdings and the Academy are admittedly difficult, not least due to the multidimensional nature of this type of performance. Yet, the Academy should demonstrate economically viable results as its functioning is partly financed by taxpayers. Another source of funding is explicitly the Academy’s own economic/business activity (on a scale comparable to that of agroholdings). In this context, commentators draw attention to some of the characteristic problems of the Academy, such as below-average crop yields, low land rent, and uneconomical land allocation, as judged by the national standards. Agroholdings too have not been the paragons of efficiency and occasionally exhibit the tendency to employ more labor and other inputs compared to non-holdings, but they do not seem to suffer from the sort of problems plaguing the Academy, and generally do not fall behind the national averages

Another area that allows direct comparisons between agroholdings and the Academy is business transparency. A number of agroholdings have pioneered new governance instruments rendering them transparent to at least some stakeholders, and thus developed the openness required for benefiting from the international financial markets. 

In the period between the mid-2000s to the mid-2010s, some Ukrainian agroholdings raised nearly USD 1.5 billion through public offerings of their shares on international stock exchanges, while additionally benefiting from funding provided by the international institutions such as EBRD and IFC

Despite a number of cases of non-transparent behavior, of which the example of Mriya Agro Holding is the most striking, it does not seem far-fetched to suggest that the access to the international financial markets, as practiced by agroholdings investing in strategic transparency, may have game-changing effects on the conduct of agricultural business in Ukraine in general. Even employee fraud and other types of the so-called agency problems can be increasingly countered by novel technological solutions implemented by agroholdings in Ukraine as well as worldwide

The success of selected agroholdings in attaining business transparency is sadly matched by a series of corruption scandals involving the top leadership of the Academy and shattering the reputation of agricultural science in Ukraine. Whereas the transparency-enhancing efforts of some agroholdings can be considered to be potentially path-breaking, the Academy exhibits an urgent need for reforms aimed at securing the minimally required compliance with the legal standards. 

Another contrast in the performance of agroholdings and the Academy pertains to their stakeholder engagement. Although agroholdings’ expenditure on social programs is much lower than their returns from agricultural production, many agroholdings are known to direct specific CSR policies to rural community development, human capital development, improvement of communication and transparency, and interaction with educational institutions. CSR engagement is often reported on the agroholdings’ websites

From an institutional economics perspective, agroholdings “direct their CSR efforts to stakeholders whose salience arises out of the transition-specific institutional shortcomings, such as the imperfections of land and labor markets”. Regardless of whether this argument is correct, it stands to reason that agroholdings run CSR programs because their leaders think of their organizations as business entities which must earn and maintain their “license to operate”. 

Self-evident as it is for the case of agroholdings, this way of thinking does not seem to have been guiding the top decision-making of the Academy, whose officials tend to perceive it primarily as a research institution rather than as a business entity. They may be right in a way, but the well-known fact is that the Academy is engaged in business activities on a scale comparable to that of agroholdings. Some commentators are explicit in dubbing the Academy an agroholding, and an inefficient one.

Accordingly, if some stakeholders of the Academy do perceive it as a business entity, they must be appalled by its lack of awareness of its own legitimacy problems and the lack of efforts to earn “the license to operate”. 

Finally, agroholdings have become increasingly standalone in the area of applied scientific research, which admittedly presents one of the Academy’s core mission activities. Over a relatively short lifespan, agroholdings have developed considerable expertise in analyzing the trends of national and global agriculture. The analytical materials produced by experts working for agroholdings and often freely downloadable from their websites, tend to be in high demand by public authorities and businesses which are increasingly using these materials as a scientific support for decision making. Furthermore, experts working for agroholdings are often familiar with, or open-minded toward, the methodological state of the art of international agricultural economics. At the same time, the internationalization of agricultural science as practiced within the Academy seems to lag behind the standards of agroholdings. For instance, within the Academy, publications in the international peer-reviewed journals tend to be perceived as a mere matter of individual prestige rather than as a valuable means of maintaining genuine interaction with the global scholarly community.

Agroholdings and Ukraine’s institutional environment

From the angle of institutional economics, the evolution of agroholdings in the midst of institutional turbulence can be usefully illuminated by “the multifunctional theory of the firm”. According to this theory, a crucial strategic choice made by a firm concerns the definition of how “multifunctional” the firm wants to be. This in turn affects the way the firm draws the boundary between itself and the function systems in which it is active. 

The firm is usually embedded in a number of function systems external to it: economy, law, politics, science, etc. At that, the firm may, for example, prefer not to rely on the legal system and instead install internal conflict resolution mechanisms; it may prefer not to rely on the political system and instead engage in its own political activities recognizable as “political CSR”; it may prefer not to rely on the science system and instead develop its own base of scientific knowledge. 

Insofar as institutional turbulence limits the effective scope of the function systems, it may provide inducements to individual firms to develop strong multifunctional profiles. This is exactly what agroholdings seem to have been doing on a large scale and at a tremendous pace.

Yet, the experience of the Ukrainian agroholdings brings nuance to multifunctional theory. The development of strong multifunctional profiles might be perceived as rivalry with the established institutions, some of which may hold considerable potential to influence public discourse. If this conjecture is right, then the negative public image of agroholdings may be simply a discursive artifact of the regime of institutional turbulence. Whereas agroholdings can be considered the artifacts of their institutional environment, the same can apparently be said of public campaigns directed against them. 

Morale and business legitimacy

Interestingly, some experts argue that institutional turbulence motivates agroholding managers to be particularly sensitive to the interests of their stakeholders who thus come to benefit from the targeted CSR programs. If the negative public image of agroholdings indeed presents a discursive and institutional artifact, then this argument is too optimistic. If the declining role of the previously eminent institutions, such as the Academy, engenders discursive effects, the resulting discourse will tend to be polarized, radicalized, and emotionalized. Most importantly, the discourse will tend to the moralization of topics which could be discussed otherwise based on scientific or professional competence. 

Upon reflection, moralization seems to be a pivotal ingredient in many attempts to question the legitimacy of agroholdings. It is noteworthy that Luhmann was highly skeptical about problem-solving potential of moral communication in the functionally differentiated society, even though he admitted that this communication can be induced by structural instabilities, such as institutional turbulence. Luhmann was however adamant that, instead of solving problems, moral communication is more likely to provoke conflicts, and he was probably right. Negative moral communication may do real damage to the public standing of agroholdings while doing nothing to help its subjects, such as the Academy, to break out of its vicious cycles. Stopping this communication, and embarking on a new dialogue, seems to be in the common interest of both types of actors. After all, they are the stakeholders of each other. 

Conclusion

In conclusion, it seems sensible to note that all over the globe, the problems of business legitimacy are taken seriously as never before. An emerging task for business ethics scholarship is to make sense of these problems, while separating the wheat from the chaff. In the Ukrainian context, what might present the chaff is the moral communication induced by the parties adversely affected by the regime of institutional turbulence. If the Academy can be taken to be such a party, the concerns voiced by its official representatives should not be taken on faith.

There is a real difference between the genuine legitimacy problems, of which agroholdings have never been free, and the discursive artifacts of the turbulent institutional environment.

Acknowledgement. Dr. Liudmila Yefimenko gratefully acknowledges the support from the Leibniz ScienceCampus “Eastern Europe – Global Area” (EEGA). She has worked on this contribution in the framework of her EEGA PostDoc Grant.

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