Cultivating Equality: Land Reform’s Potential and Challenges

Cultivating Equality: Land Reform’s Potential and Challenges
Photo: Farm in Himachal Pradesh, India, Nov. 9, 2011 (International Center for Tropical Agriculture photo licensed under the Creative CommonsAttribution-ShareAlike 2.0 Generic license).
The original and most immediate rationale for redistributive land reform is that, at low levels of capital intensity, large farms operated by wage labor will be less efficient than small owner-operated ones. This has given rise to an inverse relationship between farm size and productivity that continues to be widely observed in the literature. In fact, colonial powers had often tried to restrict access to land by the local population to ensure a continued supply of cheap and relatively uneducated labor, despite the associated economic cost. In a sense, land reform is an effort to rectify this historical injustice and reverse the pattern whereby high inequality of land is associated with low agricultural productivity and overall economic growth. This case for land reform is reinforced by the insight that in a situation where imperfect credit markets make indivisible investments difficult—in education, for instance—redistribution of assets can unleash growth by facilitating educational investment by the poor, as well as their effective participation in political processes. The political repercussions of large farm domination have been illustrated in the case of Chile, and inequality has also been shown to foster political conflict. Studies indeed support the link among high initial land inequality, low levels of human capital accumulation and limited political participation. This arises partly because an educated and mobile labor force, while good for overall development, will increase the wage bill for large landlords and may thus not be supported by them politically. Legacies whereby patterns of land ownership affect the distribution of economic and political power and the type of public services provided have also been described for India. Even in 19th century America, inequality of land ownership was associated with lower funding for public education, and landlords seem to have been able to take measures preventing credit access—and thus competition for labor—more easily in counties where land access was more unequal. The Challenges of Implementing Land Reform The extent to which implementation of land reform has been successful has depended on initial circumstances. In landlord estates where tenants already cultivated the land, all that was required was a reassignment of property rights, so that land reform was not too difficult. The organization of production retained the same family farm system, where beneficiaries already had the skills and implements necessary to cultivate their fields. Administrative requirements associated with this type of land reform were minimal, and considerable efficiency gains have often been realized by improving incentives to work and invest by former tenants. Indeed, landlord estates in Bolivia, eastern India, Ethiopia, Iran, Japan, Korea and Taiwan have been transferred to tenants in the course of successful land reforms. While evidence on the productivity impact of such reforms is less plentiful than might be desired, they have generally been associated with significant increases in output and productivity. The magnitude of such gains was affected by differences in long- and short-term incentives between before- and after-reform situations. Productivity gains from reforms were more modest if, before the reform, security of tenure and incentives to invest had already been high; cash-rent, rather than share-rent, contracts had prevailed; and landlords had provided tenants with access to credit inputs and outputs. In contrast to the generally successful experience in landlord estates, land reform in hacienda systems—that is, systems where tenants have a small house-plot for subsistence but work most of their time on the landlord’s home farm—has been very difficult. In the large majority of cases, large landowners responded to the threat of land reform by either evicting tenants who could have made claims to land ownership under a possible reform program, or converting them into wage laborers. In the case of eviction, landlords reduced reliance on hired workers either by resuming extensive livestock production and ranching or by embarking on highly mechanized self-cultivation, a strategy that was often aided by significant credit subsidies in the name of “modernization,” as in Brazil. This not only reduced tenant welfare but also depopulated farms and created further difficulties for redistributive land reform. Transforming a large farm into a viable smallholder enterprise often requires a change in the pattern of production, subdivision of the farm and construction of infrastructure—in fact, the fact that beneficiaries have higher incentives for such investment is one of the rationales for land reform. Realization of such investment requires that beneficiaries have full and secure rights to their newly received land. Yet, in a surprisingly large number of cases, the rights given to reform beneficiaries remained incomplete and by implication nontransferable. This was justified by noting that subdividing the land would be too complex and costly—or unnecessary—at the time of reform, or that the awarding of full rights should wait until beneficiaries had paid back their debts to land reform agencies. But a major factor seems to have been that giving full unconditional property rights would have eliminated any further political leverage over land reform beneficiaries for the party that supported reform and provided them with the rights. A further difficulty for land reform in hacienda systems was that in many cases the economic viability of large farms was contingent on certain types of policy distortion, such as selective agricultural protection and selective credit subsidies that by their very nature benefited large producers. Unless abandoned before or during land reform, such distortions increased the apparent “efficiency of large farms” and drove land prices above the capitalized values of agricultural profits from smallholder production, thereby increasing the economic and political cost of land reform. If they were large, failure to eliminate such distortions could easily threaten the sustainability of land reforms as it was more profitable for reform beneficiaries to transfer their newly acquired land back to the original land owners. Partly to prevent such sales of land received through land reform, many countries put in place restrictions on the ability to transfer land received through land reform. Restrictions with a time limit of a few years may be justified if markets are still highly incomplete or those who received land do not realize its full value. But the wholesale type of prohibition commonly imposed tended to undermine exits by reform beneficiaries with low levels of agricultural or entrepreneurial skills, thus often preventing efficient use of the land that has been transferred. Restrictions on land transfers also made it difficult for beneficiaries to access credit markets, while at the same time cutting off informal credit they had earlier obtained from the landlord. Recognition of the importance of credit for reforms’ success led many countries to establish banks to specifically cater to the land reform sector. While few of these were an unqualified success, they vastly increased the complexity and bureaucratic nature of the process, in some cases evolving into complex entities that had lost sight of their original purpose. Country Examples of Land Reform Land reforms in Japan, Korea and Taiwan at the end of World War II redistributed between 30 percent and 40 percent of these countries’ cultivated area, affecting about two-thirds of rural households in a way that was quick and that improved investment and productivity. As they gave landlords a stake in the development of the nonagricultural economy and allowed subsequent market-based land transfers, they set the stage for impressive increases in nonagricultural development. While collectivization had very negative effects, subsequent reform that transferred land rights from collectives to individual households set off a tremendous spurt of investment and productivity growth in China and Vietnam. In India, beyond the abolition of intermediaries, legislation was passed shortly after independence mandating tenancy reform, to grant ownership rights to tenants, and expropriation of any land held by a landlord above a certain ceiling. Anticipation of reforms led to large-scale eviction of tenants and, except in the state of West Bengal, was not followed by implementation on any meaningful scale. Land reform still had positive impacts on poverty as well as income growth and accumulation of human and physical capital. However, the slow pace of implementation and the fact that prohibitions on land rental markets remain in place threaten to over time erode any net positive impact that such reforms may have had in the past. The reason is that, with growth and diversification of the economy, the scope for beneficial land rental transactions increases greatly, so arrangements undermining these will have an increasingly negative impact. As such leasing has been shown to benefit small producers, this runs counter to the original intention of the reform and reduces equity as well as efficiency. Estimates suggest that by doubling the number of Indian producers who can access land through rental from about 15 million currently, liberalization of rental markets could have far-reaching impacts. More interestingly, even in West Bengal, maintenance of restrictions on subleasing by reform beneficiaries prove increasingly costly to maintain as the first generation of reform beneficiaries become too old to be engaged in farming themselves. They also create strong disincentives to investment; a recent study puts the efficiency losses from such arrangements in any period at 25 percent. In Kenya, land reform efforts immediately after independence that made good progress in distributing land to smallholders, often through land buying associations, were abandoned. Similarly, land reforms in Zimbabwe that had initially been quite successful were not completed, partly for political reasons. For those who had received land, the ability to invest and expand was reduced by the fact that property rights remained highly insecure. A “fast-track” reform program in the early 2000s radically redistributed land at high cost to the economy. Smallholders’ ability to address the many obstacles they faced successfully has probably made the process irreversible. In light of South Africa’s reliance on discriminatory legislation for almost a century, land reform was at the center of the post-apartheid debate. An ambitious target of redistributing 30 percent of the area under large farms within a decade or so through a “willing seller-willing buyer” approach was set, with buyers to be supported by a public grant. But, despite a generous allocation of funds and the abolition of many subsidies to the large farm sector, regulations such as subdivision restrictions remained in place, and the amount of land actually redistributed fell far short of this ambitious goal. Although large bureaucratic resources were put in place to support the process, and evidence points to beneficiaries deriving some benefits, costs were high and land reform did not achieve the scale needed to make a difference and generate employment to the extent expected. In the Philippines, early land reforms that transferred ownership to tenants benefited some half a million households and, aided by green-revolution technology, improved household welfare and increased investment and human capital accumulation. Efforts to distribute large haciendas were more difficult and often less successful. Land was given under collective titles that are now nearly impossible to individualize, as many of the original beneficiaries have left or died. Many estates transferred under land reform were subsequently transferred back to the original owners via “lease-back” agreements, while the threat of land reform and low ceilings—12.5 acres—applicable to operated areas distorted land markets and undermined credit supply to rural areas. A revision of the land reform program to address some of these issues without undermining the scope for land access by the poor is ongoing. In Latin America, reforms distributed comparatively large amounts of land but often failed to improve productivity and were insufficient to help overcome deep-rooted structural inequalities, partly because they were not implemented in a level playing field. In land-abundant countries such as Brazil, reform was often more akin to frontier settlement that was often not sustainable, and many land reform settlements were characterized by high levels of desertion. Efforts to shift the focus to already settled areas and at the same time improve the utilization of already settled land by providing credit, technical assistance and clear land title have helped improve performance in quite a number of cases. What Future for Land Reform? While the above highlights that quickly implemented land reforms had significant impact, it also suggests that realizing positive outcomes required specific challenges to be overcome. Efforts to use land reforms to improve productivity as well as well-being for the poor today must take three specific issues into account. First, population growth and subdivision of large estates have in some cases reduced the scope for implementing land reforms that would still provide beneficiaries with an income above the poverty line or comparable to what they could obtain in the nonagricultural economy. Second, with the increased capital- and knowledge-intensity of agricultural cultivation, the supervision cost advantage of small farms may be eroded by new technology or outweighed by larger farms’ advantages in terms of accessing capital and skills, meaning that land reform strategies need to be integrated into broader regional development plans. Finally, with economic development, factor markets in many rural areas now function much better than in the days of semifeudalist dependence when land reforms were introduced, creating opportunities for governments to focus on substituting for other markets rather than replacing them wholesale. These issues have implications for three types of countries. For the many countries with incomplete land reform efforts, this implies an urgent need to harness the full potential of these reforms by providing beneficiaries, or their successors, with secure and transferable rights, often through systematic conflict resolution. The case of Mexico, where the reform sector had become a byword for poverty and backwardness illustrates this well: An intensive process to resolve conflicts, improve internal governance and clarify the boundaries of land in the reform sector was needed to unleash the sector’s potential. While this has increased overall productivity, it did so by allowing some to move out, including to other countries. For countries with a highly unequal distribution of land, this implies that opportunities for reform should be considered and exploited in an integrated manner, with land as one of several critical assets for the poor. In this context, a key objective for land reform policies would be to allow broad access to and effective use of land. To achieve this, policies need to be complemented by other instruments at the regional level, including land taxation, land markets, land purchase grants, education, social safety nets and provision of other services. For countries that still have significant amounts of unutilized land, this implies a need for policies to prevent undue land concentration that could then require land reform intervention further down the line. Preventing a “land grab” by outside investors—not always foreigners—requires having a strategy for external investment, which can be attractive because of the high potential for local productivity gains and employment generation, the willingness of locals to engage and the backward and forward links to regional development that can be utilized. This requires prior recognition of rights; establishment of transparent mechanisms for valuation and negotiation so that local populations are not disadvantaged; and ways to ensure adherence to due process, mechanisms for arbitration and conflict resolution, and independent monitoring of outcomes. Providing access to productive assets through land reforms that build on the lessons from experience can increase productivity and returns to investment and be a stepping-stone out of poverty. Large returns can also often be obtained by adopting policies to address second-generation issues in countries that already undertook land reform. Thus, while the environment has changed considerably since the days when it first emerged as an important policy issue, and though links to other assets and factors of production will figure prominently, land reform remains an important policy tool to address inequality of opportunity in many situations where unequal land access has been a key contributor to poverty and exclusion. Editor’s note: A version of this article including citations and references is available upon request. Klaus Deininger is a lead economist in the World Bank’s Development Economics Group. His work focuses on inequality, land tenure and governance. In this context, he is involved in the design, evaluation and analysis of innovative programs to secure land access and land rights and improve land governance and productivity all over the world. He is also leading implementation of the land governance framework in more than 40 countries worldwide. He has published more than 50 journal articles and is the lead author of a number of books, “Rising Global Interest in Farmland” and “The Land Governance Framework,” and is the lead organizer of the World Bank’s Annual Conference on Land and Poverty. He has a doctorate in applied economics from the University of Minnesota, a master’s degree in agricultural economics from the University of Berlin, and a master’s degree in theology from the University of Bonn.

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