Agrarian reform and economic development: ‘equity’ with efficiency

In last week’s column, I gave the background to land reform. CARP, which will be under scrutiny for extension by June 2014, will surely evoke more discussions.

“Raul Fabella’s critique. The thought-provoking paper of Raul Fabella on land reform provides a starting point, and I summarize the salient points of his critique below:

(a) The objective of redistributing large holdings of agricultural lands, 5.05 million of 5.37 million hectares by 2014 will have been accomplished, according to government target. This accounts for 99 percent of the announced target in hectarage.

(b) However, CARP has failed to achieve the purpose of uplifting the economic welfare of farmer recipients. It has simply created a new class of farmers: “the landed poor.”

(c) This sad outcome is the result of many design and implementation flaws of the CARP.

(d) The paper recommends that CARP refocus its objective toward efficiency by correcting the design flaws in the program. (Literally, this means: stop the redistribution where it is at, move on and allow greater flexibility in the use of the land asset to enable greater efficiency in agricultural production.)

(e) Among these moves, the operation of larger agro-industrial firms that trade their stocks in the Philippine stock exchange without land ceiling would permit greater agricultural output and productivity.

Below, I elaborate on three elements of this critique. There will be other occasions to go over other issues that relate land reform with development issues.

“Elaboration 1: productivity and size of farms.” An important contribution of Raul Fabella’s work is the review of evidence on land reform, both international and local that have relevance to the Philippine experience.

International studies on farm size and economic efficiency supported the “small size of land is beautiful” thesis. Such studies showed that small land sized farms are positively related to greater productivity.

However, later studies after 1988 appeared to have questioned this conclusion. When a previously omitted variable, “land quality,” was introduced to these earlier works, the conclusion turned the other way – that larger farms are more efficient than smaller ones.

Successful economic outcomes in terms of land size on key attributes attributed to the factor of production. It could be quality of “land” or the “human” factor. Such distinctions relate to the nature of the inputs brought into land cultivation or the ability (technical/managerial/entrepreneurial) of the farmer-manager. When these are taken into account, land size appears not to matter.

As to the studies of Philippine farms under the land reform experience, many of them have not provided highly supportive evidence of success as hoped for by CARP. Even though they were undertaken under the stimulus of CARP, they do not give a resounding vote in support.

In general, the comparative performance of farms that are recipients of CARP have lower average productivity than non-CARP farms. Certainly, this says much in terms of outcomes, especially since the government has been spending a lot of government resources in support of promoting institutions and practices that help the CARP.

Most of the studies of the land reform experience with respect to large size are on rice and staple food crop agriculture. Yet, the land reform phenomenon covers a wide range of agricultural crops.

For many of these crops, large requirements of land have been the practice. Their breakup into small units – even when managed under a cooperative organizational framework – has disrupted the traditional production relationships.

“Elaboration 2: agrarian reform land is a frozen financial asset.” The design of the CARP provides that the land, while under way to final titling to the beneficiary, is part of a collective title to all recipients of land reform, the CLOAs (Certificate of Land Ownership Awards).

The title is, however, still a long time coming. It takes years of amortization payments before the land could be fully paid. The CLOAs are essentially a collective title to the land recipients. Each recipient cannot separately use the title to enable access to formal credit.

Hence what it represents is a frozen financial asset as far as the legal credit institutions are concerned. For instance, the farmer-recipient cannot borrow from a bank using his claim as collateral. If the land-reform recipient could make use of the land asset, the farmer could adjust his situation to his needs.

Such freezing of asset from other forms of negotiability hampers the value of award as land reform recipient. The farmer is definitely handicapped and farming efficiency is prevented. Yet, to the poor farmer, the payments for the land represents a large portion of his work effort.

Given that access to formal credit is denied, the farmer’s recourse is to turn to informal channels of credit where costs are so much higher and the outcome for them is worse. Reports of illegal market transactions based on land abound. They cannot be neglected.

“Elaboration 3: unstable property rights result in uncertainty and low investments in agriculture.” These conditions have permeated the country’s agricultural sector over the years.

When CARP was extended to all forms of crop agriculture, the immediate adverse impact was on corporate farming. Many of the plantations in tree planting (forestry, rubber trees, palm trees, coconut) were thus affected.

Plantations with foreign direct investment in bananas, palm trees, rubber, pineapples and so on were likewise affected. Though these were few in numbers, they further discouraged this form of investment in agriculture. Moreover, this certainly clouded further the investment environment for the corporate sector engaged in plantation agriculture.

Instead of land reform creating a magnet for agricultural development, the program has hampered such growth. The weak record on the growth of corporate farming in the country is evidence of this negative impact.

Land reform should strengthen property rights. But the experience is that it threatened these on a wide scale in agriculture. Thus, it has instead shaken the stability of property rights.

Recipients of property rights through the grant of land transfers had been unable to make use of those rights to give them greater flexibility in their efforts to meet their needs.

The potentials for agricultural growth have not been fully realized. Instead of agriculture becoming a magnet for investments, there has been capital flight from agriculture.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/