Rural Organization and Land Reform in Brazil: The Role of Nonagricultural Benefits of Landholding

Rural Organization and Land Reform in Brazil: The Role of Nonagricultural Benefits of Landholding Author(s): JulianoJ.
Assuno Source: Economic Development and Cultural Change, Vol. 56, No. 4 (July 2008), pp. 851-870 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/10.1086/588167 . Accessed: 25/02/2014 15:30
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Rural Organization and Land Reform in Brazil: The Role of Nonagricultural Benets of Landholding
juliano j. assunc a o
Pontif cia Universidade Cato lica do Rio de Janeiro (PUC-Rio) I. Introduction Land reform is a pervasive and controversial issue in Latin America. Economists and policy makers usually associate the highly unequal pattern of land ownership with many aspects of economic development, such as poverty, inequality, efciency, political power, racial conicts, and environmental strain. However, after many years of attempts, access to land remains an unsolved problem in most of these countries (De Janvry and Sadoulet 2002). Despite some differences in implementation, Latin American land reform programs share the common feature of being embedded in an economic environment where (i) market imperfections and policy distortions tend to set a wedge between the price of land and the capitalized value of the income stream generated from agriculture and (ii) the land rental market is relatively thin. Land is used not only as an agricultural input but also as a source of other benets. Especially in countries characterized by high macroeconomic instability, as in Latin America, people demand land as a mechanism of protection against aggregate uncertainty, as a tax shelter, or as a means of laundering illicit funds (Berry and Cline 1979; Branda o and Feder 1996; De Janvry, Key, and Sadoulet 1997; Carter and Zegarra 2000). Furthermore, the functioning of the land rental market is commonly limited in Latin America by legal restrictions and transaction costs (Macours, De Janvry, and Sadoulet 2001; De Janvry and Sadoulet 2002). This article investigates the consequences of a nonagricultural demand for land in an occupational choice model with heterogeneity in farming skills and missing credit and land rental markets. The model shows that unskilled
I would like to thank the editor and the two anonymous referees for valuable comments. I am also grateful to Ricardo Paes de Barros, Fla vio Cunha, Maitreesh Ghatak, Humberto Moreira, Bernardo Mueller, Walter Novaes, Pedro Olinto, Jacques Potin, Jose Guilherme Resende, Marcelo Rezende, and Hugo Sonnenschein for helpful suggestions on a rst version of this article. Financial support of the CAPES Foundation and CNPq (Conselho Nacional de Desenvolvimento Cient co e Tecnolo gico) is thankfully acknowledged. Any remaining errors are my own.
2008 by The University of Chicago. All rights reserved. 0013-0079/2008/5604-0004$10.00
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economic development and cultur al change
peasants, even being unable to manage agricultural production, become landowners in order to obtain nonagricultural benets from landholding. The absence of a credit market contributes to this allocation by preventing skilled peasants from buying the land from unskilled farmers. In addition, if the land rental market does not work properly, those unskilled farmers keep their land unimproved, resulting in a decrease of aggregate agricultural production. The resulting allocation is inefcient in the sense that potentially there exists a compensation scheme (which is not necessarily rst-best implementable) in which the economy is better off. However, in an economy with a perfect land rental market, unskilled farmers who accumulate land for nonagricultural purposes can lease out their land to be cultivated by skilled peasants, which increases overall agricultural output. Thus, the land rental market can establish an efcient resource allocation even if people demand land for nonagricultural purposes. This model has two main implications for the design of public policies aimed at improving agricultural production in Latin American countries. First, the model suggests a change in the design of land reform programs. According to the model, contrary to what has been recently implemented in many countries (Deininger and Feder 2000), land reform should be aimed at small farmers instead of at landless peasants in order to improve efciency. On the one hand, occupational choice is endogenous. Agricultural workers may decide to keep or not keep their previous job, selling the land provided by the program for consumption. On the other hand, farm size is endogenously related to the farmers ability and land use in the model. Occupational choice determines that landless people and the wealthiest landholders are, on average, less skilled than small farmers. Second, the model highlights the importance of credit and land rental markets in an environment characterized by nonagricultural benets of landholding. De Janvry and Sadoulet (2002, 1), for example, suggest that access to land through assistance to rental offers possibilities that have not been pursued and deserve urgent attention. Credit markets are another issue that has been incorporated into market-assisted land reform programs implemented in such countries as Brazil, Colombia, and South Africa (Deininger 1999). The results of the current study contribute to the literature of agrarian organization and land reform. Notwithstanding the recognition of the importance of a nonagricultural demand for land in Latin America by many scholars, a systematic analysis of its consequences has not been well examined in the existing literature. For comprehensive surveys of the literature, see Binswanger and Deininger (1997), Carter and Zegarra (2000), and Deininger and Feder (2000). Although some authors, such as Conning (2001), Conning
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and Robinson (2001), and Baland and Robinson (2008), have constructed models that exhibit features often observed in Latin America to analyze agrarian organization and land reform, most of the literature considers general aspects or else are case studies from Asia.1 The remainder of this article is organized as follows. Section II depicts key aspects of the land markets in Latin America that are analyzed in the model. Section III presents the theoretical arguments regarding how the nonagricultural purpose of landholding is likely to affect efciency in economies with and without a land rental market. Section IV discusses the policy implications of the model, and Section V concludes. II. Context A. Nonagricultural Payoffs of Landholding Land is not only an agricultural input but also an important economic asset with distinguishing features. According to De Janvry et al. (1997, 19): In many countries, land values have been inated by policies that encourage investment in land for nonagricultural reasons. The price of land may exceed the capitalized value of future agriculture prots if the land is being used as a hedge against ination, as an asset that can be liquidated to smooth consumption in the face of risk, as collateral for access to loans, as a tax shelter, or as a means of laundering illicit funds. In order to illustrate the store-of-value motivation for landholding, I present some evidence about the effect of macroeconomic instability on land prices in Brazil. The results show that land prices are much more sensitive to the launch of drastic economic measures than are rental rates. Brazil has experienced a long period of high ination. For instance, considering the period from 1980 to 1994, the (simple) average monthly ination measured by the CPI (consumer price index) was 15.9%. The government, facing this challenge, adopted a sequence of policies to contain the inationary process during the 1980s and 1990s. Those heterodox policies resulted in unexpected (and exogenous, from the point of view of agricultural producers) increases in uncertainty for the economy. The implementation of the economic plans aimed specically to contain ination through a set of measures, including deindexation of the economy, temporary price freezes, and a freeze on nancial assets to reduce the economys liquidity and generate resources for
See Grossman (1994) and Horowitz (1993) for the political economy aspects of land reform or the studies of land reform in India by Besley and Burgess (2000) and Banerjee, Gertler, and Ghatak (2002).
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TABLE 1
EFFECTS OF ECONOMIC PLANS ON LAND PRICES IN BRAZIL
Pastures Estimates (A) Constant (B) Dummy variable: new economic plan in t (B)/(A) (%) (C) Dummy variable: new economic plan in t 1 (C)/(A) (%) R2 Sale 1,520.1 (.0000) 591.1 (.0120) 38.9 733.1 (.0021) 48.2 .17 Rental 118.2 (.0000) 24.0 (.0046) 20.3 19.2 (.0219) 16.2 .14
Cropland Sale 2,643.8 (.0000) 877.8 (.0183) 33.2 1,095.1 (.0036) 41.4 .15 Rental 196.4 (.0000) 11.1 (.2983) 5.7 2.85 (.7877) 1.5 .02
Chi-Square Statistics for the Test of Equality across Equations Dummy variable: new economic plan in t Dummy variable: new economic plan in t 1 6.860 (.0088) 10.836 (.0010) 6.231 (.0126) 9.867 (.0016)
Note. All series were detrended and centered on the original mean. Since the original time series were nonstationary, I use the Hodrick-Prescott lter to detrend them in order to compute meaningful statistics. The p-values are in parentheses.
the budget. The uncertainty introduced into the economy by those drastic measures generated a large shift in the demand for safe assets, including land. I compare the effects of the implementation of such policies on land prices for sales and for rentals. The data consist of semiannual observations of land prices for sales and rentals covering the period 19662000. They were collected by the Getu lio Vargas Foundation, which gathers information from more than 3,600 local agencies scattered among many Brazilian districts. Observations refer to actual transactions and are collected within the districts at the end of each semester. There is data on prices of pastures and cropland. All prices were deated to a 2000 level using the IGP-DI (general price index, calculated by the Getu lio Vargas Foundation). In addition, prices are detrended by using the Hodrick-Prescott lter and are centered around the original mean. Two dummy variables were builtone indicating the introduction of a new economic plan in the current semester and another related to the institution of an economic plan in the previous semester. The following plans are considered: Cruzado (February 1986), Bresser ( June 1987), Summer Plan ( January 1989), Collor (April 1990), and Real ( June 1994). Table 1 shows the regressions of land prices (col. 1) and rental rates (col. 2) on the dummy variables representing the launch of the economic plans. Thus, the intercept of each regression can be interpreted as the averaged land price in the absence of new economic plans in the current and in previous semesters. The coefcients of the dummy variables represent the average
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changes in prices at the time of the implementation of the economic plans and in the subsequent semester. The results suggest that the economic plans promoted signicant increases in land prices for sales of both pastures and cropland in the current and in the next semester, accounting for more than 15% of the total variability of these variables from 1966 to 2000. The effects on rental rates are much smaller and are statistically insignicant for cropland. This suggests that the response of land prices for sale to an exogenous increase in macroeconomic instability is larger as compared with rental rates. The uncertainty introduced by the unusual economic plans has increased the demand for land, more substantially affecting land prices than land rental rates. The demand for land leasing seems less sensitive to macroeconomic shocks. For pastures, the economic plans have determined an increase of almost 40% in land prices of sales in the current semester and up to 50% in the next one. The rental rates have experienced a much lower increase, around 20%. For cropland, table 1 shows signicant increments only for land prices, both in the current semester and the subsequent one. The difference between pastures and cropland might be a result of the demand for livestock as another source of hedge against macroeconomic risks. Indeed, the tests for equality of coefcients across equations show that the effects of the economic plans on land prices and rental rates are statistically different at the standard levels of signicance. In the next section, the theoretical model sheds light on the interpretation of these results, showing that the difference in the responses of land prices and rental rates to macroeconomic shocks is due to a nonagricultural component of the demand for land. Under certain conditions, the model predicts an increase in the gap between land prices and rental rates in periods of high economic instability. Although this article focuses on one specic mechanism behind the nonagricultural motive for landholding, other possibilities have been suggested in the literature. As pointed out by Branda o and Feder (1996, 191), insofar as land is a factor of production and a store of wealth, it is also a source of political power, especially in societies where access to other assets is limited. Baland and Robinson (2008, 5, 18) also argue in terms of the political power of the elites in Latin America: Nowhere is the evidence about landlord control of elections so conclusive as in Latin America. . . . Landlords (in Chile) systematically controlled rural voting until the late 1950s. There is a consensus amongst historians, political scientists and sociologists about how this system functioned. . . . Large landlords usually registered all their employees, by teaching them how to sign their names (as literacy was a condition for vote
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TABLE 2
INTERNATIONAL INDICATORS
Indicators Number of holdings Total area (hectares) Average farm size Land gini coefcient Agricultural land (%) Cropland (%) Meadows and pastures (%) Land tenure (area; %): Owner and owner-like Rented from other Mixed and others Below 10 hectares: Farms Area
Latin America 10,281,607 705,586,803 68.6 .83 65.7 20.4 79.6 85.5 3.6 10.7 58.7 2.5
Asia 143,934,358 268,741,639 1.9 .52 91.8 99.5 .5 88.7 2.8 8.5 97.4 72.6
Europe 7,625,520 125,394,061 16.4 .64 70.6 65.6 34.4 61.4 23.3 15.3 74.5 11.4
United States 1,911,859 377,088,222 197.2 .75 88.9 52.1 47.9 33.9 11.6 54.5 29.5 1.2
Source. World Census of Agriculture (1990, 2000). Note. Latin America p Argentina, Brazil, Colombia, Chile, Honduras, Panama, Paraguay, Peru, Puerto Rico, Uruguay, and Venezuela. Asia p Bangladesh, Cyprus, India, Iran, Japan, Nepal, Pakistan, Philippines, Thailand, and Turkey. Europe p Austria, Belgium, France, Italy, Luxembourg, Portugal, Spain, Switzerland, and the United Kingdom.
registration). The day of the election, the employer would go vote with all their employees. B. The Land Rental Market and Land Use This section presents some evidence on the organization of the agriculture sector of Latin American countries. Although there are no data available to substantiate this issue directly, the following data provide a general overview that supports different aspects of the subsequent analysis. Table 2 compares several indicators for Latin America with those of Asia, Europe, and the United States. Overall, Latin American countries present a highly skewed distribution of land, and agricultural land is mostly represented by meadows and pastures that remain underused. Also, there is a thin rental market in Latin America, which is reected in the fact that 85% of the agricultural land is operated by owners. This combination of characteristics suggests that land distribution in Latin America is characterized by large landowners who operate underused farms (pastures) and who do not lease out or sell their holdings. Even with a potentially high demand for land for agricultural purposes, 58.7% of the farms have fewer than 10 hectares. This combination makes Latin American agriculture unique, and the fact that only one-fth of the agricultural land is not covered by pastures and meadows may indicate that agricultural production in Latin America is below its potential. Although Asian countries exhibit the same tenure structure, they have a much more egalitarian distribution of land and a substantially smaller average
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farm size. The rental market in Asian countries is also limited. A predominance of cropland indicates a high intensity of land use. The situation in European countries is similar but less radical. The rental market is active, and only 61% of the area is operated by landowners. The United States, in contrast, exhibits a highly concentrated land distribution as in Latin America, with a high average plot size. However, only one-third of the area in the United States is operated by landowners, and less than 30% of U.S. farms have fewer than 10 hectares. As a result, 52.1% of U.S. agricultural land is cropland. III. Model The key feature to be addressed in the model is that land provides nonagricultural payoffs to its owners. As pointed out by Berry and Cline (1979, 11), in countries with poorly developed capital markets, especially those with chronic ination, landowners may nd it attractive to hold land for speculative gainor merely to accomplish the store of value objective. I focus on this specic mechanism of nonagricultural landholding, and I assume that there is a monetary loss in savings between the periods of life. Therefore, this requires a dynamic structure even though the main argument developed below is essentially staticdynamic issues are not considered in the model for the sake of simplicity and tractability. I start with an intertemporal setup that is converted into a simple static environment in which the main implications are derived. A. Setup Consider an economy with an innite number of periods and overlapping generations of two-period-lived peasants. In each period, a large population with mass normalized to one is born, and it has wealth distribution Gt (a). Initial wealth is received by each individual in the form of a bequest from the individuals parents. All individuals are sorted and named according to their initial wealththe peasant labeled 0 is the poorest, and the peasant labeled 1 is the richest. Peasants devote their rst period of life to production and their second period of life to consumption. There is a monetary loss in savings between the young and old ages that occurs with probability p [0, 1]. This loss can be prevented only by the holding of land titles. The parameter p can be interpreted in different ways it can represent the probability of loss to theft, the probability of an economic crisis, or expected ination eroding the value of nancial assets. Individuals have an endowment of one unit of labor, which is supplied inelastically, either on the individuals own farm or when the individual works for someone else as an agricultural laborer. Although the population is com-
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pletely homogeneous with respect to its ability to work, there is heterogeneity in farming skills. The distribution of skills is assumed to be independent of the distribution of wealth. At each level of wealth, a fraction a of individuals is skilled and the remaining fraction of 1 a is unskilled. The agricultural good, taken as the numeraire, is produced by skilled farmers and consumed by everyone. Skilled farmers can expect to produce q units of output per hectare using a xed-coefcients production function that requires one worker for every unit of land. Agricultural production is a random variable with an expected value equal to q and a nite variance. Production takes one period to be done, and the inputs, land and labor, can be hired in competitive markets at prices p and w, respectively. Unskilled farmers, in contrast, are restricted to the exploitation of natural resources (like hunter-gatherers), an activity that requires no extra labor and that produces e ! q expected units per unit of land. The exploitation of natural resources is also a random variable with a nite variance. Whether a peasant is skilled or unskilled has no effect on his productivity as a worker, and so the wage rate is uniform; to simplify, the wage is paid in the second period. The dynamics of the economy are as follows. Each generation produces or works when young and consumes when old. In a period t, young farmers spend their wealth buying land from the old-aged farmers of previous generations and contracting young workers to be paid in the second period. In the second period, peasants receive their incomes (wages or agricultural prots), sell their land to youths of the next generation, and allocate their nal wealth between consumption and bequests. Agents are risk neutral, and the preferences of an individual born in period 1g t are given by cg t1 at1 , where ct1 is the consumption of the second period and at1 is the bequest for the next generation. Thus, the indirect utility function of an individual with initial wealth at and nal wealth yt1, where yt1 is determined by the occupational choice and the realization of the random variables, is represented by
g U(at , yt1) p max ctg1 a1 t1 ct1,at1
subject to ct1 at1 p yt1 p gg(1 g)1gyt1.
(1)
Here ct1 p gyt1 and at1 p (1 g)yt1. The preferences are such that consumption ct1 and bequests at1 are proportional to the nal wealth yt1.
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Initially, it is assumed there is no land rental market.2 Section III.D examines the consequences of opening a land rental market for this economy.3 Unskilled farmers cannot use their land titles to prevent monetary loss, and they also cannot lease out their land to skilled peasants for agricultural production. The only option open to them is to exploit natural resources. Finally, in order to keep the analysis of occupational choices interesting, agents cannot borrow to nance their land purchases. Hence, the access to land is constrained by the initial wealth, as in the literature on occupational choices with nancial constraints (Banerjee and Newman 1993; Galor and Zeira 1993). Denoting the farm size by T, the lack of a credit market implies that pT a for a peasant with initial wealth a. In summary, there are three possible occupations in the economy. In the rst period of life, each individual faces an occupational choice problem before the realization of the random variables regarding the agriculture and the exploitation of natural resources. From (1), the expected utility of the individuals in any case is completely determined by the expected nal wealth E( yt1) since E(U(at , yt1)) p gg(1 g)1gE( yt1). Given the structure described above, the expected nal wealth of an agent born in period t is
(1 p) at wt if worker, E( yt1) p (1 p) at eTt ppt Tt ( pt1 pt )Tt if unproductive farmer, (1 p) at (q wt )Tt ppt Tt ( pt1 pt )Tt if productive farmer,
(2)
where at is the initial wealth, pt is the price of land, and Tt is the farm size. Note that a proportion 1 p of wealth that is not used for land purchasing is lost. Young farmers buy land at price pt and sell it in the next period at price pt1. In summary, landholding provides three kinds of potential benets: agricultural prots, protection against monetary loss, and price appreciation. Notice that if farmers spend all their initial wealth on land, they become completely hedged against monetary loss, while landless workers are fully exposed to the loss imposed by p. Recall that we are employing a dynamic structure for our model solely to build a meaningful land market where savings decisions are important. Land
Many arguments have been used to determine imperfections in land rental markets: risk sharing (Cheung 1969), hidden actions and moral hazard (Stiglitz 1974; Eswaran and Kotwal 1985; Ghatak and Pandey 2000), screening (Hallagan 1978; Allen 1982), and limited liability constraints (Shetty 1988; Laffont and Matoussi 1995). 3 Notice that there is a clear distinction between land leasing and land sale in the model, even considering that land is used only in one period. Although both types of operation allow agricultural production, only the land titles can provide a safe device for savings. At the end of the agricultural production, landowners can sell their lands and recover the initial wealth invested.
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transactions occur between young peasants (buyers) and old-aged peasants (sellers). However, this article is not focusing on such dynamic issues as wealth accumulation or class formation. To simplify the analysis, we consider a timeinvariant distribution of wealth Gt p G, which can be thought as the longrun and stationary wealth distribution of the economy. In this case, the model is made up of a simple sequence of static decisions, and only stationary equilibria are considered. Hereafter, it will be assumed that pt1 p pt p p, and all time indices will be dropped.4 B. Occupational Choices The analysis of occupational choices involves a comparison between consumption proles, given the price of land and the wage rate. First, the occupational choices are derived. Then, the prices w and p are determined in competitive markets. Both extractors and farmers choose their farm size taking p as given. The absence of a credit market means that the demand for land belongs to the interval [0, (a/p)]. Since nal consumption is a linear function of T in (2), they decide for either T p 0 (becoming workers) or the maximum size affordable T p a/p. Equivalently, the demand for labor for farmers is equal to a/p, because agricultural technology requires one worker for each hectare of land. Substituting the demands for labor and land in (2), nal consumption becomes
(1 p)a w if worker, E( y) p [(e/p) 1]a if unproductive farmer, {[(q w)/p] 1}a if productive farmer.
(3)
The occupational choice follows from the comparison of consumption possibilities in (3). Skilled peasants choose among all three possible occupations, and they become productive farmers if and only if q e w and a wp { a1. q w pp (4)
If q e w, productive farms are (weakly) more protable than the extractive activity and every skilled farmer undertakes agricultural production.5 Unskilled
Another simplifying assumption is the linear production technology. As a consequence, different from Carter and Zimmerman (2000), wealth inequality persists over time, producing a stationary equilibrium in which some individuals are hedged against monetary loss. Again, the model is focused on the effects of nonagricultural benets of land on rural organization and the design of land policies. 5 Section III.C shows that, in equilibrium, w cannot be strictly larger than q e.
4
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Figure 1. Occupational choices
peasants, however, are limited in their choices: they must become workers or extractors. They establish themselves as unproductive farmers if and only if a wp { a2. e pp (5)
It is easy to see that a1 ! a 2 if and only if q w 1 e. The occupational choices can be completely described by the initial wealth if q w e, as is depicted in gure 1, which represents the population in a box with skills in the vertical axis and wealth in the horizontal axis. From left to right, individuals are ordered from the poorest to the richest. The individuals at the top of the box are unskilled, and those at the bottom of the box are skilled. Lemma 1. For every pair (w, p) such that w q e, unproductive farms are (weakly) larger than agricultural farms on average. Lemma 1 is a consequence of heterogeneity in farming skills being coupled with credit market imperfections (as shown by Assunc a o and Ghatak [2003]). This result is especially interesting in the context presented here because it implies that farm size contains information regarding land use. Figure 1 shows that all farmers with plots of size T [(a1/p), (a 2 /p)] demand land only for agricultural production. A fraction 1 a of large landowners, with T 1 a 2 /p, retain their holdings only to collect natural resources, doing so without agricultural production. Section IV will examine the implications of this result for the design of redistributive policies.
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C. Equilibrium An equilibrium in the land market should equalize the aggregate demand for . Conditions (4) and (5) determine that land to the xed supply of land T skilled peasants with wealth greater than a1 and unskilled peasants with wealth greater than a 2 demand a/p hectares of land each. Therefore, the equilibrium condition in the land market can be arranged as a
adG(a) (1 a)
a1
. adG(a) p pT
(6)
a2
Equation (6) determines that the total expenditure on land purchase is equal to the value of land endowment. There is a subsistence activity that requires one unit of labor to generate a payoff of w without land. This is available to any individual. It is assumed that agricultural technology strictly dominates the subsistence activity, that is, q 1 w. (7)
To simplify the notation, individuals in the subsistence sector will be referred to simply as workers, with w p w. As a result, the equilibrium wage rate belongs to the interval [w, q e]. If w 1 q e, the demand for labor is zero because nobody aspires to become a farmer, resulting in a decrease in w until w q e. However, if w ! w, the supply of labor is zero because the subsistence activity provides a better alternative. In the labor market, the equilibrium condition is given by 1 a p
adG(a) aG(a1) (1 a)G(a 2 ),
(8)
a1
with the strict inequality holding only if w p w. The left-hand side of (8) is the demand for labor, while the right-hand side is the supply of labor. The equilibrium wage rate and the price of land are determined by the endowments of the economy and the wealth distribution. For example, given is sufciently low, only the equilibrium with G, if the land endowment T w p w can prevail. In order to evaluate the role of public policies, I adopt the notion of productivity enhancing allocations. Since the land policies considered in this article might imply a redistribution of assets and since the economy is already constrained by missing markets, there are no Pareto-improving policies. Bardhan, Bowles, and Gintis (2000, 545) dene a policy as productivity enhancing if the gainers could compensate the losers and still remain better off, except that the implied compensation need not be implementable under the
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informational conditions and other incentive constraints in the economy. In the context of the model, a productivity-enhancing policy is possible whenever . the aggregate agricultural production is below its maximum value qT In the model, agricultural production is undertaken only by skilled peasants with wealth greater than a1. Thus, the aggregate agricultural production is a Qpq# p
adG(a) .
a1
Using (6), Q can also be expressed in terms of a 2; in equilibrium, that is, 1a Qpq# T p
, adG(a) ! qT
a2
(9)
is the maximum aggregate agricultural production feasible. where qT Agricultural production is maximal only if there are no extractive farmers. The next proposition summarizes the agricultural efciency of agricultural production in the model discussed above. Proposition 1. In the absence of a land rental market, agricultural production is depressed; that is, there is a role for productivity-enhancing policies. From (9), agricultural production is not maximized whenever a 2 ! . In this situation, there are alternative allocations of resources that improve the aggregate production. Section IV will elaborate on the design of land reform policies as a means of improving aggregate agricultural production. Two limiting cases are important for summarizing the driving forces behind the inefciency. First, suppose that extractive benets are arbitrarily low (e r 0) and that therefore a 2 p w/p. This is a situation where unskilled farmers demand land exclusively to prevent monetary losses. The existence of a nonagricultural use of land, expressed by p 1 0, determines a reduction in agricultural production because part of the land endowment is barely used. Since there is no land rental market, those farms are kept unimproved. In this case, if p p 0, all land is used for agricultural purposes (since a 2 p ) and the maximal feasible production is achieved. Second, assume that there is no monetary loss such that p p 0 and, consequently, a 2 p wp/e. In this case, the distortion in agricultural production comes from failures in the credit and rental markets rather than from the fact that land is used as a hedge against ination. In summary, the absent credit and rental markets jointly decrease the ag-
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gregate agricultural production because of the heterogeneity in farming skills. This effect is exacerbated by the nonagricultural demand for labor if p 1 0. D. Opening Up a Land Rental Market Previous results are derived in an environment where there is no land rental market. The absence of the rental market can be associated with potential policy targets, including nancial constraints or threats against property rights. In the case of nancial constraints, for example, such measures as credit for land rental can be used to overcome the problems related to ex ante limited liability constraints (Laffont and Matoussi 1995). Moreover, when the problem is related to threats of squatting by the tenant, measures to improve secure tenure can be used as an important instrument of land policy (Macours et al. 2001). Despite many implementation issues that are not taken into account, the following analysis suggests that improving the land rental market should be a goal of public policies. It is shown that a land rental market can establish an efcient allocation of resources even in the presence of a nonagricultural purpose for landholding. In the perfect land rental market case, decisions about farm size T and cultivated area A are disentangled. During their youths, individuals decide on land purchases and land leases. Those peasants whose cultivated areas exceed their farm sizes have to pay a rent to cover the difference, A T. However, young peasants with unimproved land receive rents. Let s denote the rental rate. Then, consumption during old-age in the case of a perfect land rental market becomes
(1 p)a w if worker, E( y) p (1 p)[a pT s(A T )] pT eA if unproductive farmer, (1 p)[a pT s(A T )] pT (q w)A if productive farmer.
In each occupation, consumption is linear both in A and in T, which results in corner solutions. Analogous to the previous case, the absence of a credit market implies that pT s(A T ) a.6 The following analysis considers only equilibria in which q w (1 p)s 1 pp (1 p)s 1 e (1 p)s. (10)
Under (10), skilled peasants choose T p 0 and A p a/s. Unskilled farmers, however, choose A p 0 and T p a/( p s). Notice that, as long as w q e, it is not possible to have the opposite, that is, land ownership in the hands
Notice that there is a distinction between the price of land and the rental rate even though individuals produce for only one period. While rental rate refers only to land use, price of land also accounts for sale of the land in the following period.
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of skilled peasants being leased out to unskilled peasants. If (10) does not hold, there are no rental transactions in the market, which is a situation of less economic interest. The analysis derived in the case with no land rental market still applies, and the new thresholds (levels of wealth associated with the indifference among occupations) are given by a1 p ws/[q w (1 p) s] and a 2 p w ( p s)/[pp (1 p) s]. Condition (10) implies that a 2 1 a1. The aggregate demand for land property is (1 a) a 2 [a/( p s)]dG(a), while the aggregate demand for cultivated area is a a1 (a/s)dG(a), that is, respectively, (1 a)
, adG(a) p ( p s)T
(11)
a2
. adG(a) p sT
(12)
a1
. Aggregate agricultural production is, therefore, Q p q(a/s) a1 adG(a) p qT Proposition 2. In all equilibria with rental transactions (in which [10] holds), a perfect land rental market drives the economy toward a situation where there is no role for productivity-enhancing policies even if p 1 0. The existence of a perfect land rental market makes land ownership irrelevant for agricultural production since there is no investment in the model and peasants have complete access to land in a competitive rental market.7 All available land is used for agricultural production, resulting in efciency. As a consequence of the linearity of the model, unskilled peasants own all available land, which is rented out to, and cultivated by, skilled farmers. IV. Policy Implications In the absence of credit and land rental markets, the previous analysis suggests the existence of an inefcient allocation of resources (the aggregate agricultural output is depressed) that is exacerbated by nonagricultural land use. Different policy implications can be derived from the model. This section analyzes the effects of redistributive land reform policies and improvements in the credit and land rental markets.
For an analysis of the effect of land tenure on investments, see Banerjee and Ghatak (2004).
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A. Redistributive Land Reform Redistributive land policies have been adopted in many developing countries to promote agricultural development.8 Redistributive land policies in many countries have consisted of important land transfers from large landholders to landless people. To evaluate such policies in the context of the model, it is important to dene three different classes of peasants, previously introduced in gure 1: Agricultural workers/landless peasants: poor skilled peasants with wealth below a1 and unskilled peasants with wealth below a 2. Individuals within this class do not have enough wealth to acquire an adequately protable farm, preferring to employ themselves as workers. Small farmers: individuals operating plots with size T [(a1/p), (a 2 /p)]. All landowners within this group are skilled peasants. Large landholders: farmers with plot size T 1 a 2 /p. A fraction a of those farmers are skilled, and the remaining fraction 1 a of those farms are operated by unskilled peasants. Consider, initially, that the social planner can distinguish between productive and unproductive farmers. Thus, any transfer from unproductive farmers to skilled farmers improves aggregate agricultural production. Once agricultural technology faces constant returns to scale, the choice of the beneciaries is driven solely by initial wealthall skilled farmers with a a1 are potential beneciaries, and farm size does not play any particular role. All peasants with wealth strictly below a1 and unskilled peasants with wealth strictly below a 2 are choosing to become workers. As a result, marginal increases of a for those peasants do not affect their occupation choices. Therefore, if the beneciaries are landless, they are more prone to sell the received plots for consumption. Now, assume that the ability of each farmer is not observed. As a consequence, policy instruments are restricted to be conditioned only on farm size and transfers from unskilled peasants to skilled farmers are not allowed. In this context, there are two selection problems with the implementation of redistributive policies: the choice of the beneciaries and the choice of which land is to be conscated or bought. The model has a partial solution to this problem, indicating that small farmers should be the beneciaries. Although the type of farmers is not directly observed, it can be identied by farm size. The previous sections showed that all farms with small plots, varying from
8
See Deininger and Feder (2000) for a survey.
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a1/p to a 2 /p, are operated by skilled farmers. Therefore, transfers from large landholders to small farmers increase aggregate agricultural output. The probability of reducing productive farms among large landholders, 1 a, is lower than the probability of increasing productive land among small farmers, which is equal to 1. B. Market Improvements The absence of credit and rental markets is a key ingredient of the analysis. Section III.D shows that a perfect land rental market can establish an efcient allocation of resources even if a credit market does not work and people demand land for nonagricultural purposes. Similarly, a perfect credit market can eliminate inefciency. With free access to credit, all skilled individuals can manage productive farms and agricultural output is maximized. These two observations suggest that achieving market improvements should be a policy target. As pointed out by De Janvry and Sadoulet (2002), the land rental market is an important instrument of access to land in many countries. In Latin America, while measurement errors and underreporting may overstate such weakness, the land rental market is unquestionably thin. This is the case for a variety of reasons. De Janvry and Sadoulet (2002, 1) report: Case studies in a number of countries show that main limiting factors to land rental transactions are weakness of property rights and lack of reliable conict resolution mechanisms. Consequences are rentals that are few, informal, shortrun, and segmented as they occur within narrowly dened circles of condence (by kinship, proximity, farm sizes, and social class). Rentals are also sometimes forbidden (land reform sector) and rents controlled at excessively low levels. Based on this diagnostic, results from Section III.D suggest that such measures as strengthening and enforcing property rights and formalizing exible rental contracts can increase agricultural production and enhance land use. The missing credit market prevents skilled peasants in the model from buying land from unskilled farmers. A credit market could eliminate the restriction that pT a, which would allow all skilled individuals to participate competitively in the land market; this would establish an efcient allocation of resources. But credit markets are characterized by informational issues that impede their functioning (Ghosh, Mookherjee, and Ray 2000). In this sense, economic policies of public credit for land acquisition can improve land use even if there is a nonagricultural motive for landholding and no rental market. Currently, public credit for land acquisition is an important part of the community-based approach to land reform being implemented by Brazil, Colombia, and South Africa (Deininger 1999).
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V. Conclusion This article analyzes the implications of nonagricultural land use to agrarian development in an economy characterized by limited credit and land rental markets. It shows that a nonagricultural motive of landholding in the presence of nancial constraints generates a potential mismatch between the distribution of land and the distribution of farming skills. It argues that this inefciency arises not because land is more than an agricultural input but rather from the way that the land rental market fails to operate. In terms of policy implications, the model suggests that small farmers instead of landless people should be the target of redistributive land reform programs. These small farmers have a greater chance both of having better farming skills and of being less willing to sell the obtained land for consumption. In addition, improvements in the credit and land rental markets can have substantial consequences in enhancing land use and in increasing aggregate agricultural production. References
Allen, Franklin. 1982. On Share Contracts and Screening. Bell Journal of Economics 13, no. 2:54177. Assunc a o, Juliano J., and Maitreesh Ghatak. 2003. Can Unobserved Heterogeneity in Farmer Ability Explain the Inverse Relationship between Farm Size and Productivity? Economics Letters 80, no. 2:18994. Baland, Jean M., and James A. Robinson. 2008. Land and Power: Theory and Evidence from Chile. American Economic Review, forthcoming. Banerjee, Abhijit V., Paul J. Gertler, and Maitreesh Ghatak. 2002. Empowerment and Efciency: Tenancy Reform in West Bengal. Journal of Political Economy 110, no. 2:23980. Banerjee, Abhijit V., and Maitreesh Ghatak. 2004. Eviction Threats and Investment Incentives. Journal of Development Economics 74, no. 2:46988. Banerjee, Abhijit V., and Andrew F. Newman. 1993. Occupational Choice and the Process of Development. Journal of Political Economy 101, no. 2:27498. Bardhan, Pranab, Samuel Bowles, and Herbert Gintis. 2000. Wealth Inequality, Wealth Constraints and Economic Performance. In Handbook of Income Distribution, ed. Anthony B. Atkinson and Francois Bourguignon. Amsterdam: Elsevier. Berry, Albert, and William R. Cline. 1979. Agrarian Structure and Productivity in Developing Countries. Baltimore: Johns Hopkins University Press. Besley, Timothy, and Robin Burgess. 2000. Land Reform, Poverty Reduction, and Growth: Evidence from India. Quarterly Journal of Economics 115, no. 2:389430. Binswanger, Hans P., and Klaus Deininger. 1997. Explaining Agricultural and Agrarian Policies in Developing Countries. Journal of Economic Literature 35, no. 4:1958-2005. Branda o, Anto nio S. P., and Gershon Feder. 1996. Regulatory Policies and Reform:
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The Case of Land Markets. In Regulatory Policies and Reform: A Comparative Perspective, ed. Claudio Frischtak. Washington, DC: World Bank. Carter, Michael R., and Eduardo Zegarra. 2000. Land Markets and the Persistence of Rural Poverty in Latin America: Post-Liberalization Policy Options. In Rural Poverty in Latin America: Analytics, New Empirical Evidence and Policy, ed. Ramo n Lo pez and Alberto Valdes. London: Macmillan. Carter, Michael R., and Fred Zimmerman. 2000. The Dynamic Costs and Persistence of Asset Inequality in an Agrarian Economy. Journal of Development Economics 63, no. 2:265302. Cheung, Steven. 1969. The Theory of Share Tenancy. Chicago: University of Chicago Press. Conning, Jonathan. 2001. Latifundia Economics. Unpublished manuscript, Department of Economics, Williams College. Conning, Jonathan, and James A. Robinson. 2001. Land Reform and the Political Organization of Agriculture. CEPR Discussion Paper no. 3204, Centre for Economic Policy Research, London. Deininger, Klaus. 1999. Making Negotiated Land Reform Work: Initial Experience from Brazil, Colombia, and South Africa. Policy Research Working Paper no. 2040, World Bank, Washington, DC. Deininger, Klaus, and Gershon Feder. 2000. Land Institutions and Land Markets. In Handbook of Agricultural Economics, ed. Bruce Gardner and Gordon Rausser. Amsterdam: Elsevier. De Janvry, Alain, Nigel Key, and Elisabeth Sadoulet. 1997. Agricultural and Rural Development Policy in Latin America: New Directions and New Challenges. FAO Agricultural Policy and Economic Development Series 2. Rome: Food and Agriculture Organization of the United Nations. De Janvry, Alain N., and Elisabeth Sadoulet. 2002. Land Reforms in Latin America: Ten Lessons toward a Contemporary Agenda. Paper presented at the World Banks Latin American Land Policy Workshop, Pachuca, Mexico. Eswaran, Mukesh, and Ashok Kotwal. 1985. A Theory of Contractual Structure in Agriculture. American Economic Review 75, no. 3:35267. Galor, Oded, and Joseph Zeira. 1993. Income Distribution and Macroeconomics. Review of Economic Studies 60, no. 1:552. Ghatak, Maitreesh, and Priyanka Pandey. 2000. Contract Choice in Agriculture with Joint Moral Hazard in Effort and Risk. Journal of Development Economics 63, no. 2:30326. Ghosh, Parikshit, Dilip Mookherjee, and Debraj Ray. 2000. Credit Rationing in Developing Countries: An Overview of the Theory. In Readings in the Theory of Economic Development, ed. Dilip Mookherjee and Debraj Ray. London: Blackwell. Grossman, Herschel. 1994. Production, Appropriation, and Land Reform. American Economic Review 84, no. 3:70512. Hallagan, William. 1978. Self-Selection by Contractual Choice and the Theory of Sharecropping. Bell Journal of Economics 9, no. 2:34454. Horowitz, Andrew. 1993. Time Paths for Land Reform: A Theoretical Model of Reform Dynamics. American Economic Review 83, no. 4:100310.
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Laffont, Jean J., and Mohamed S. Matoussi. 1995. Moral Hazard, Financial Constraints and Sharecropping in El Oulja. Review of Economic Studies 62, no. 3:38199. Macours, Karen, Alain De Janvry, and Elisabeth Sadoulet. 2001. Matching in the Tenancy Market and Access to Land. Unpublished manuscript, Department of Agricultural and Resource Economics, University of California, Berkeley. Shetty, Sudhir. 1988. Limited Liability, Wealth Differences and Tenancy Contracts in Agrarian Economies. Journal of Development Economics 24, no. 1:122. Stiglitz, Joseph E. 1974. Incentives and Risk Sharing in Sharecropping. Review of Economic Studies 41, no. 2:21955.

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economic development and cultur al change

economic development and cultur al change

economic development and cultur al change

economic development and cultur al change

subject to ct1 at1 p yt1 p gg(1 g)1gyt1.

economic development and cultur al change

Figure 1. Occupational choices

economic development and cultur al change

adG(a) aG(a1) (1 a)G(a 2 ),

economic development and cultur al change

economic development and cultur al change

See Deininger and Feder (2000) for a survey.

economic development and cultur al change

economic development and cultur al change

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