Agri Econ 23, Why forever Agrarian Reform should stop

I am reposting portions of a presentation by Dr. Raul Fabella made at UPSE in May 2014. I agree with his arguments -- the endless, forever extended deadline of agrarian reform (AR) or forced land redistribution should end. It is now 44 years since the Marcos AR program in 1972, longer if AR programs in the 50s and 60s by previous administrations are counted.

Forever AR is a major source of uncertainty for agri business development and modernization. For instance, you buy and convert a 10 hectares low-productivity farmland, spend huge amount of time, years and money. When the land has become productive and you start earning big to get some returns for your investments and hard work, pay for some loans, the Department of Agrarian Reform (DAR) people can suddenly come in from nowhere to tell you that your land will be forcibly redistributed by the government to your workers. The government will pay of course, but at lower rates and valuation dictated by the state, not at prevailing market rates and prices.
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The Record

* By 2014, CARP shall have distributed 5.05 million hectares, leaving but 321 thousand hectares or an accomplishment rate of 99%.

* 2.6 million farmers shall have gained some form of ownership to an average 1.2 hectares, shall have acquired and distributed 16% of the total Philippine land area of 30 million hectares.

* Japan’s vaunted land reform distributed only 1.76 million hectares of its total 37 million or 4.7%.

* Taiwan distributed 0.5 million hectares of its total of 3.62 million or 14%.

- (Adriano, 2013)

2008 APPC Study: “Land Reform, Rural Development and Poverty in the Philippines: Revisiting the Agenda”

• Per Capita Income: Income of ARC members with land was greater than income of ARC members without land. Income of Non-ARC members with land is greater than income of Non-ARC members without land;  Land ownership seems to matter.

• But when other factors are controlled for, neither being an ARB nor being an ARC member explains differences in income per capita.

• This implies that “land ownership via CARP” is an “inferior type ownership.”

• Our hypothesis: inferiority is associated with Section 27 and Section 6 (the land ownership ceiling of five hectares) of CARP.

• Being an ARB correlates negatively with access to formal credit even though land ownership correlates positively. This shows the property rights frailty of CARP.

• Conclusion of APPC Study

“Twenty years later, the results of the Comprehensive Agrarian Reform Law (CARL) launched in 1988 were below expectations. Productivity growth in agriculture has been low by regional standards and poverty still plagues rural areas. Total agricultural factor productivity has grown only 0.13% per year during 1980-1998, compared to 0.87% per year in Thailand and 1.49% in Indonesia…”

Design Flaws

• Unequal exchange: The productivity of land depends in its capacity to command financing. CARL effectively outlawed that capacity, making the land conveyed to the beneficiaries “effectively inferior” to that bought at market price from the landowner.

• Entrepreneurship Myth – give a tenant a piece of land and he/she morphs into an entrepreneur. Self-selection be damned.

• Coase Theorem be damned! Section 6 (ownership limit) and Section 27 effectively outlaw land asset exchange.

• The market be damned! The state supplants the market as arbiter of efficient use of assets.

• Economic size: If the land (3 hectares) is not “economic size” for a crop and location, it is a high-default risk, loses the capacity to command credit and is worth less than as part of a larger credit-worthy parcel.

The beneficiary is short-changed and condemned to fail! Economically unviable property rights are not stable.

• Size Economies: if economic size farm for a crop in a vicinity is > 5 hectares, consolidation will go underground (up to 100% in some villages) where property rights are unstable.

(India’s land ceiling ranges from 4-21 hectares depending on state; Sri Lanka’s is 20 hectares; and Cuba’s is 67 hectares!)

• Comprehensiveness: Same rules for all crops, whereas successful, templates stopped at rice lands! The Marcos effect?

• Consequences: Private capital flight; Sumilao as parable; a permanent credit crunch in the agricultural sector; low investment rate due to unstable property rights and no scale-up possibility. High rural poverty!

Private Capital Flight from Agriculture

Ratio of Total Bank Lending Share to Share in GDP: Agriculture

 1980, 60%;  1990, 50%; 

2000, 35%;  2010, 19%.

Quo Vadimus?

• No farm land ownership limit for publicly-owned firms listed with the PSE.

• Allow efficient farmers to own up to x > 5 hectares of agricultural land.

• Allow banks operating in rural areas unlimited ownership of land.

• Finish converting Collective CLOAS to individual CLOAS.

• A progressive farm land tax vice LAD.

State Capacity and Failure

• When a state overreaches, the result is a state failure: actions by government makes market failures look like God’s gifts.

• The Philippines widely recognized as a weak state: does too many things badly; too many windows for waste and corruption; it should do fewer things well.

• Poverty Reduction by sticking to basics: better courts of law, better highways, better overall governance, cheaper and more stable power supply.

The 1662 Book of Prayer expresses best the relation between societal health and state overreach:

“We have left undone those things which we ought to have done; and we have done those things which we ought not to have done. And there is no health in us.”

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See also:

Agri Econ 5: Land Reform Without Timetable is Wrong, July 01, 2010

Agri Econ 9: On Agrarian Reform and Agri Credit, April 29, 2013

Agri Econ 14: NO to Further Extension of Agrarian Reform, July 03, 2014 

Agri Econ 20, On NFA-BOC Campaign for Expensive Rice, May 19, 2015

Agri Econ 21, Rice protectionism as poverty-maximizing policy, September 25, 2015

Agri Econ 22, Why "peak food" hypothesis is wrong, December 25, 2015

Agri Econ 9: On Agrarian Reform and Agri Credit

Below are some exchanges that I and some friends made last January 18-20, 2013 in my facebook wall. Posting their comments with their permission.
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Tibs Filbert Arsenal Arceño Hi noy, for me one main factor why local harvested rice have higher prices compared to other asian countries is land ownership. As practiced, most land planted w/ rice are being owned by absentee landowners. Since these lands are cultivated by tenants, workers or renters—a portion of price of produces are considered before taking into account the base price for the market. While in Vietnam majority of rice farmers are landowners. So we end up paying absentee landowners a part of the rice we eat even though they do not take part of the actual production. i believe that agrarian reform is still key to development in the countryside. 

Nonoy Oplas Not really Tibs. Local rice production simply cannot keep pace with rising population (1.7 million a year net of death and migration). Rising rice prices -- along with prices of tilapia, chicken, galunggong, pork, house rental, school tuition fees, etc. -- are natural. Rice farmers themselves want higher price for their palay too as they have rising needs for their households. What is objectionable is using more tax money for agri cronyism like what the NFA is doing.

On agrarian reform, it is among the main sources of agri business instability. You develop an ugly, marginal, cogonal land into a mango orchard or banana, pineapple, rambutan, etc., and when you succeed in making that land productive, DAR people will come to you to say that they will forcibly redistribute your land to your workers. You will not be happy when that happens, so many agri business ventures are postponed, or kept at low key levels.

Shakaru Macht Well, Nonoy, Tibs has a point. For more information, please read Henry George. He has an elegant book entitled Progress and Poverty. Its premises explain how poverty exists despite economic growth. Inequality of access, possession and ownership of natural resources - in particular land is emphasized here.

By the way, I fully agree with you not having forced land transfers, nor practicing the agri-cronyism done by the SUPER-REGULATORY BUREAUCRACIES of our government, who are given virtually divine powers who uses or benefits to what. It's not only inefficient - but also gives undue advantage to the special interests like the big farms and haciendas...

Tibs Filbert Arsenal Arceño yet it could be an additional income for the rice farmers if they own the land. just imagine about 15-25% of the income goes to the absentee landowner.

noy how about a discussion on the rise of the bombay/turko sector and its effect on our economy especially on our SME's. one day you see a turko collecting 5/6 among market stall owners riding a motorcycle. after 5 months he's already using a brand new adventure or a vios. after another 5 months, he is now riding a high-end hi-lux pick-up. how come they end up successful in their business? how come that turkos----who cannot speak our dialect and are oftentimes held-up--- succeed?

Nonoy Oplas Some absentee landlords extract exorbitant rents, some simply lose their lands to land grabbers, rich and poor alike. Squatting for instance, is land grabbing. If a land owner is seldom seen in his property, chances are that farmers won't pay the regular rent while other people will start building houses, other structures in the land.

About the Bombay/Turko lending, they fill up certain sectors of the credit market. In formal sectors like banks, borrowers like those in palengke must go to them, fill up certain forms, present a collateral, convince the bank officers that they have the capacity to pay back, do transactions only on weekdays and non-holidays. In the Bombay system, it's the entire opposite: the lenders go to the borrowers, do not require loan application form, do not require collateral, only word of mouth recommendation from other borrowers, do transactions 7 days a week incl holidays. The bank officers are holed up in air-con, fully guarded place, the Bombay endure heat, dust, rain, traffic, muggers and hold uppers. The admin cost of lending and collecting to each small borrower is high. I am not justifying that their 20% per month interest rate is good, it's just how the lenders would value their effort and risks endured. Which also reflects the failure of the government banking regulation system that force the formal lenders like banks to become extra careful, resulting in their inability to serve the micro but numerous borrowers.