20876 RUIRAL DEVELOPMENT NOTE T H E W 0 R L D B A N K No.3 JULY1999 Land Policy in Developing Countries well developed and communal land _n rural areas, land is an growth depends on the security, ownership has traditionally per- essential productive asset and duration, and enforceability of formed an insurance function, individualized property rights may, a means to sustain a livelihood. property rights, which determine by depriving certain groups of access Access to land is important for investment incentives, and on to this resource, also carry social costs. To reduce such costs, mechanisms household welfare, aggregate the extent of markets to rent and such as communal use of pasture economic growth, and sustain- sell land. In addition, land and forest areas or periodic land redistribution are often maintained able reduction of poverty. It is imarkets are often an important long after societies have adopted important to reduce poverty, ingredient in the development an individualized land rights system. Policy interventions that would because in many developing of financial markets. This Note change the structure of land tenure, economies access to land allows discusses several elements of or the way in which individuals can access land, must consider the effects the poor to make productive use land policy that could help on both efficiency and equity. of family labor, improve their create a framework for efficient Communal Tenure Arrangements. In nutritional status, smooth land allocation through prop- most societies with a low population consumption, and improve their erly functioning land markets, density, individuals have usueructary income and well-being. The as well as improve access to land ship rests with the community some . f1 1 r . ~~~~~~~~~~~economists eonsider such tenure contribution of land to economic by the poor. ause - ~~~~~~arrangernents as iniferior because they might lead to problems of open access and diminished investment incentives. Recent research and Secure Property Rights increase the supply of formal credit. empirical evidence, however, indicates Secure property rights are important Land with secure, clearly-defined, that with low population density, to increase agricultural output through and easily-transferable ownership communal tenure systems can be a incentives for investment, effort, and rights is ideal collateral. And third, cost-effective means to ensure secure the ability to transfer land at low cost well-defined ownership rights make tenure, and that there are many to more efficient producers. In it easier to transfer land to more measures short of tnfettered in di- addition, secure property rights are efficient users from those who are vidual tenure that could be adopted important for equity because it is the not as efficient. Property rights can to enhance productivity and equity. poor who are normally least able to bc very secure, of course, even if thev defend their property rights. Although are not defined at the individual level, with a low population density, there is agreement that a system of indeed there are many circumstances communal systems have advantages enforcealle land rights is a key public where definition of ownership rights because the cost of establishing, good that can provide high returns, at the community level appears to be enforcing, and maintaining records the most appropriate way to improve an adequate arrangement for secure Of individual plot boundaries is tenure security clearly depends on tenure. often not commensurate with the tenure specurityclenvrlynmepends ori tenure.limited incremental benefits from the specific environment. Defining individual property rights full individual ownership. Also, Conceptual Basis. Secure property can be costly. Most immediate are the communal resource ownership often rights provide three main benefits. expenses to physically delineate plots, provides public goods that may be First, secure tenure increases incentives establish and maintain accurate difficult to realize under a structure to supply labor, and if the time horizon records, enforce rights, and resolve with full individual rights. In addition, is long enough, long-term investment. disputes. In situations where other the magnitude of the disadvantages Second, secure land ownership can markets for risk and insurance are not that have traditionally been associated FROM THE RURAL DEVELOPMENT DEPARTMENT OF THE ENVIRONMENTALLY AND SOCIALLY SUSTAINABLE DEVELOPMENT NETVVORK RDN 1 with communal tenure structures individualizecd tenure systems a may be more limited, for a number wort')while arrangement. of reasons: First, under the informal systcm it Individual cultivators. In most communal needs to be apparent that the level of systems arable land is cultivated land disputes is reducing the cultivators' individually, in some cases even with perception of secure tenure, as well inheritable use rights, and only as their incentives to invest, ability pasture and forest or fishing grounds to engage in land transactions that are used by the whole community. enhance efficiency, or use land as Outsidersprohibited. Although most collateral. communal systems prohibit land Second, many empirical studies point transactions with outsiders, rental toward access to formal credit as an_ and sales within the community important benefit of formal title. allow members to realize a significant imprtnt be rmalite. partof te eficiecy avantges This benefit will be realized only part of the efficiency advantages where at least an incipient formal associated with land transactions. credit market (allowing use of title as Potential shortcomings. Some of the collateral) exists and investment potential shortcomings of communal opportunities are available. Empirical tenure systems are encroachment, a studies show that even after titl±ng growing number of boundary disputes, programs, many small farmers and land grabbing by chiefs or remained beyond the reach of formal other powerful ind ividuals. Rather credit. ta Dhai ate po pert`rigtss Third, land titlng should be systematic rg~ime doumentato oeitng rihs, clarification of bounidaries and area-based rather than 'on demand' (with systematic resolution of for both reasons of efficiency and disputes at the community level), equity. and increased transparency in the If there are no adequate safeguards, For this reason, the B3ank has long greatly ameliorae such problerms. titling can permanently deprive advocated the elimination of macro- certain groups of their land rights. economic and sectoral policy distor- The critical issue is that efficiency For this reason, specific attention tions as a precondition for land and equity effects of land tenure will should be devoted to ensuring that markets that are intended to help depend upon, among other factors, i the rights of historically disadvan- enhance productivity. It is, however, an area's access to infrastructure and taged groups (women, indgenous important to note that in addition to markets, and the resulting economic residents, and the poor) are protected, productivity, producers' ability to specialization. If access and special- and ii) land market transactions n a access credit, inputs, and insurance ization of the infrastructure are post-titling environment are not markets will affect the extent and type limited, then the scope for capital- likely to be severely biased against of land transactions, In particular. intensive investment, use of land as the poor or vulnerable. credit constraints may prevent family collateral, and efficiency gains from farmers from translating their pro- transactions in land markets will also Land Markets ductivity advantage into effective be limited. If cultivators benefit from A key underpinning of the Banks demand in either land sales or investing, then low-cost community- land policy is the inverse 'farm size rental markets. based arrangements are generally productivity relationship; whereby Markets for Selling Land. Policymakers sufficient to ensure efficient factor for many (but not all) types of farming often conclude that owning land is use. As population density, access to and cropp ing systems, ±amxilyoperated preferablue tohretowing bu larketst other markets, and land valuesincrease, farm units are e.conomically more s,ell land arethemselves not free of then investment, credit access, and efficient than large farms that rely on sendial themin s impersonal exchange of land bccomc wage labor. Family workers have the potential shortcomings. more important, and thereby increase incentive to exert maximum effort. First, if access to capital markets is the payotfs from formal mechanisms By shifting land to more productive irnperfect, landless households may to define land ownership. (family-based) operators, and without not be able to obtain the credit Unrestricted Individual Rights and other imperfections, transactions in a necessary to acquire land from larger Formal Titles. One indicator of an freely operating land market would farms. Imperfections in the credit insufficient traditional tenure system improve both efficiency and equity. market can more than outweigh the is when the number of land-related However, the presence of various productivity advantage of family disputes increases. The literature policy distortions (for example, farmers. In addition, if the land value provides guidelines about the circum- subsidized credit), tend to give an as collateral in formal credit markets stances that make formal (titled) artificial advantage to large farms. is capitalized into land prices, the i, q In many developing economies access to has shown that equity and efficiency land allows the poor to make productive use of land rental contracts can be , of fami!y labor, improve their nutritional enhanced by (i improved market status, smooth consumption, and improve /' - E their income and well-being. informaton and enforcement of contracts; (ii) increased access to distortions cannot be tackled, creatg other markets and off-farm opportu- markets to sell land in such circum- nities; and (i augmentedbrgining 9 stances may not be desirable, ~~~~power for tenants. Rather thntryinig to enforce rental restrictions that are / A i t i Markets for Renting Land. Even if of doubtful value, governments imperfect markets for credit and concerned about tenant welfare r insurance reduce the market oppor- should dismantle these restrictions. tunities to transfer land from large to small producers, such transactions L and Reform could still take place in the land rental Long-standing impediments to market. By renting land, landowners smoothly functioning land, labor X .. would not forgo the credit access and product markets contribute to associated with land ownership (and highly unequal land distribution in - could even advance credit they obtain many countries Large tracts are not * to a tenant under an interlinked used as productively as they could be contract). under this arrangement, the under a family-operated farming K > - . .? -- . family-managed tenant farm is able system, while small producers are to show ~~~~~~confined to marginal and often xx.oswproductivity advantages, environmentally fragile lands. Whereinvestmentis im ortant,the Es eciallyinsituationswhere past disincentives to undertake long-term policy interventions continue to ; investments that are inherent in reduce the extent of rental market short-term rental arrangements could activity, unequal land distribution is be minimized by adoption of long- also often linked to social unrest and equilibrium price of land at given term contracts that provide tenants violence. In this context, policies of reditcostsm pcan ofxcend athe preent with compensation for visible land reform have often been adopted cditcosts can e e the pr esent improvements. Compared to selling to improve the distribution of dicune vau of th inom st-ream land, markets for land rental are less productive assets, increase aggre gate from the land. Policy distortions such afdb m perfect rent arkess greate as subsidies and selective tax advan- affected by imperfect credit markets, forand tages for large farms work in the are characterized by lower transaction rental and sales markets, and solve the direction. costs, improve the welfare of people political and social problems associated same alrectlon. with limited wealth, and can Yfacilitate with widespread landlessness. Second, in a risky environment with acquisition of agricultural and man- La f imperfect insurance markets, shocks agement knowedge b tenants as a Historical Experience. Iranl reform in such as a drought may be associated first step on the 'agricut_ural ladder: landlord estates where virtually all the with large s- in s in t ssopiand land was already cultivated by tenants witn large swin s in tne supp v and . bacien- demand of lanc as well as in rand Paradoxically, while land rental differs from the experience in hacien- prices. By forcin lg small farmers to markets that function well could das where labor tenants had access to sell land at lowv prices during crisis provide substantial benefits, many only a house plot for subsistence, but and leaving them unable to replenish countries have severely restricted the were needed to supply labor to the their asset base afterward, such shocks scope for land rental especially under landlord's farm. Because tenants can pauperize smallholders while share tenancy contracts to prevent already cultivated the land and had lanl accumulates in less productive 'exploitation' of tenants in what was access to markets on landlord estates large holdings i considered a feudal mode of produc- (for example, Taiwan, Korea, or Japan), large holdiiigs. tion. Research has challenged the once it was politically feasible, land Finally, fixed transaction costs associated justification for such interventions reform was relatively easy to imple- with land sales make it difficult to sell by showing that the efficiency losses ment. It appears to have increased small parcels of land or subdivide large from share tenancy are, in practice, equity and efficiency and provided a farms for use by many small producers, much lower than assumed. Empirical starting point for subsequent non- which makes transactions between evidence shows that tenancy restric- agricutural development. By contrast landholding classes extremely rare. tions not only failed to achieve their in haciendas (South Africa and most of objectives, but often had directly Latin America), land reform was very For~ ~ al of, ths,esns hrr perverse effects. diffcultforsevcralreasons: situations when markets to sell land may not lead to a more efficient and In spite of these concerns, government- Change croppingpatterns. To shift from equitable allocation of land. if access induced restrictions on t£c function extensive, monocropped, and mecha- to land by the poor is an important ing of rental markets have become a nized large farms to a labor-intensive, policy objective and if other policy major source of inefficiency. Analysis diversified, and year-round small RDN 3 Appropriate policies can help improve access costs. Further reducing transfers to to land by the poor. eitnladw rspers to be possile byintegatingthe rogram South Africa, Brazil, Colombia, and inoabodrsto oiis to Guatemala have taken this opportunity ipoefntnngfladmarkers. to pilot a decentralized 'negotiated' Prograom benefits. The speed at which -~~~~~~~~~~apoc to lan reform ON ~ ~ ~~~~~~~ppoc oladrfr.beneficiary groups are able to reahize The key element of this approach is benefits is surprising. Diversification, a limited one-time grant to poor increased scope for investment in households interested in establisbing perennial crops and small-scale a productive enterprise. The main irri ation, land access as a means of farming system requires changes in purpose of this grant, which can be se -insurance, and existenice of cropping patterns anid complemen- usedfor purchasing land, comple- spillovers from land reform benefi- tary investments in productive and mentary investments, or technical ciaries to other groups within the social infrastructure, assistance, is to help the poor overcome locality have all emerged as bleefits. Politics. The low labor intensity ke ele ots a o Evaluation. Given the different target of highly mechanized large farms oterwise prevent their participation groups addressed by prog rams in implies a need to select beneficiaries in land markers. varial cnries, can alusale over and above workers already on Based on these planned objectives to qiantifte effects, isolate the farm. Even where indiviual and the income they generate, be eficial imlmnaion features, forms of cultivation were chosen, beneficiaries negotiate independently and comprthgouseaedb the selection process often failed with landowners on the modalities la reenf tor poide a riatefincetives and (including the purchase price) of a other goverment progas will be for io voluntary tranisfer of land in the of great iaterest and allow instead relied heavily, on political matket. With an overall cap on the immediate feedback about the design cofpecexpesrinc and rources of grant size and the possibility to use of land reform programs. oc overnmerrense and resacrqes on any money not spent on land acqui- Concusn relic h eveavil tsn Lexndprorition. sition for complementaly investments, Concluion fresiofheallvaiy on wexpropriaion. bthere is a strong incentive for the Throughout much of the developing the slectin proess ften ailed withandonersnthemodalties lad, theformpltio n t ose faeneacting fo Policy distortions. The continuing urchuser to nepotiate a favorable mothe conmpleftorms of f hingh presence of policy distortions (Tor Pandprice. Save or the provision of magcreto noeme roarms hstr high example, credit subsidies for large the grant, reglatory enforcement of ighted ate needbtacklate strutur farmers that were capitalized in land the rules of the game, and monitori ng dissues tiia ur e prices increased the cost of the and evaluation, there is no substantive tre devo nit Te issues rinclud pricales nens thed definitionn ofy propert right tonnladaqi Cnlso rogrm hand often made it rational role for central government, land, the conditions that govern the prop beeiiries to sell out rather t d,t than self-cultivate. Evidence from pilot programs ion exchange of such rights, and market Cates that although t re are areas and non-market forces through Negotiated Land Reform. c tacroeco- for improvement, a 'negotiated' wich marginalized parts of the nomic reforms, in particular trade ap roach to land reform is faster population gain access to land. Policy liberalization and d the elimination of ad cheaper than tradtional models, advice in this situation requires distortions in favor of large farms, and beneficiaries are more satisfioed. awareness of(i the advataoves as well havc led to a precip itous drop in land While in-depth evaluation of these as pitfalls of individualiQe land prices in a umber of countries (in experiences will be necessary, soin ownership and the costs and benefts south Africa and Brazil land prices preliminary conclusions and of formalizing them; ntii the relation- fell by up to 70 percent). Along with haall ves ae emerged: ship between markets for land and the shift of comparative advantage to c e other factors of poction lincluding more labor-intensive crops and a wave Program design. Establising a limit on credit) and the imlations for land of bankruptcies affecting heavil the size of the grant and ensurinig m awrket liberal tn; and tiiia the indeted te darge farms, the scope o that it can be used for land purchases scope and limitations for land efficiency-enbancing transactions as well as complementary vestments reform as one means to quickly in land markets has improved, has proven critical ton keepdown improve access to land by the poor. the mmshitof comparatv adatg to ote atr fpodcin(ntd This Note was prepared by Klaus Deininger and Gershon Feder of the World Bank. The Rural Development Note series summa- rizes good practices and key findings about topics related to rural development. These Notes are distributed widely to Rural Family staff and are also available on the Rural Sector website (http://essd.worldbank.org/essd/rev/rdvhom.nsf/ RuralStrategyHolder?OpenView). 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