22753 AGRICULTURE & NATURAL RESOURCES DEPARTMENT DISSEMINATION NOTES TOWARD SUSTAINABLE PRODUCTION SYSTEMS AND RURAL POVERTY REDUCTION Number 4 August 1995 Market-Assisted Land Reform: A New Solution to Old Problems Studies worldwide show that large estates landed elite, because they own most of the and collective farms, which are still wide- land and because they have the political in- spread in southern Africa, Latin America and fluence to manipulate the bureaucracy. These eastem Europe, are less efficient than small, privileges are a fiscal drain. Besides, they get family-operated farms. Land reform, which capitalized in the price of land, and the sub- reallocates land from large holdings to family sequent rise in land price means that land farms, can improve equity, productivity, em- becomes too costly for the poor to buy, even ployment and rural growth. if they can get credit at reasonable rates. Historically, land reform has been im- Blanket Debt Relief plemented by government agencies expro- priating land, with or without compensation, Macroeconomic adjustment in countries can and then distributing it to the landless. Such lead to high interest rates for some years, and reform is typically undermined by disputes, the abolition of subsidies and other farm delays and inefficiencies. A new approach, privileges can mean that farmers who bor- market-assisted land reform (MALR), is being rowed on the expectation of substantial prof- explored jointly by the World Bank and its suddenly face losses. When a farm debt South Africa, and also independently by Co- crisis occurs, banks are reluctant to foreclose lombia. MALR aims to encourage willing on mortgages, since they will find few buyers buyers to negotiate deals with willing sellers, of land, except at give-away prices. Farmers with the government facilitating the process and bankers often form coalitions to demand through grants and other supportive meas- generalized debt relief, and governments ures. have sometimes succumbed to the pressure, Several conditions are needed for success- e.g. in Brazil, Colombia, Mexico. However, ful reform; it should be preceded by the end such generalized relief confers windfall gains of special privileges and tax breaks for agri- on viable farmers who have no need of res- culture; it should be accompanied by macro- cue; subsidizes inefficient farms that would economic adjustment; it should include otherwise have failed, releasing land for grants to poor farmers, and measures to in- other more efficient farmers to purchase; and crease the supply of land; it should include, imposes a substantial fiscal burden on the in countries with thinly populated mecha- government. An alternative is to provide nized farms, a program for bringing in set- limited subsidies to banks to encourage fore- tlers from outside the area; and it must be closures, as well as grants to poor, landless supplemented by substantial public invest- people who want to buy land-thus, in- ment in developing regions targeted for re- creasing the demand for land. This can solve >VW form. a farm debt crisis more efficiently and at far .xi lower fiscal cost than generalized debt relief. E What Should Land Reform Avoid? The lower fiscal burden will also aid macro- X* economic adjustment. N W Excessive Subsidies, Tax Breaks and Other C so E p nB Privileges ~~~~~~~~~~~~Confiscation or Expropriation at Below %M110 Privileges Market Prices Most of these benefits are captured by the Expropriation may succeed after a violent AGR Dissemination Notes are an output of the Agriculture and Natural Resources Department of the World Bank. E_ Further information and additional copies may be obtained by contacting Dean Housden, ext. 36637. revolution-as in China in 1949, but in less Administrative Selection of Beneficiaries radical circumstances, expropriation wil be Bureaucrats are not well equipped to identify resisted. Large landowners and others who farmers with the most skills or enterprise, or fear expropriation may form a powerful po- to screen out land speculators trying to get litical alliance that can seriously undermine cheap land speculatorselecto de- or een evese lnd efom- s inChie ater cheap land. Administrative selection can de- generate into patronage, and much land may Pinochet came to power. Disputes over ex- be allotted to undeserving candidates, in- propriated land and legal delays can run into cluding nominees of the landed elite. Ad- decades-Mexico's land reform was con- ministrators may demand bribes even from tested for more than 50 years. This penalizes deserving beneficiaries. potential beneficiaries disproportionately. Such people typically have high discount Settling Beneficiaries on Low Quality Land rates, meaning they greatly prize immediate The land most easily available is often of low benefits but attach virtually no current value to eneitstha coe atersevn o eiht quality, including that owned by the gov- to benefits that come after seven or eight ernment. Low quality land may be suitable years. only for ranching, not for settled agriculture, Land Acquisition by Govemments or State and distributing this to beneficiaries is a rec- Agencies ipe for failure and environmental degrada- The administrative costs of official agencies tion. Such land should not be included in the are large, and can exceed the cost of land in land reform program. If the government it- are arge an canexced te cot o lan in self has surplus low quality land, this should cases where legal disputes delay land trans- fer. Bureaucracies generaly do not know be sold to ranches, and the sale proceeds howrto takeintaccount generly differences in used to buy better quality land suitable for how to take into account fully difrne n settlement. land quality and agrocimatic conditions. They are less likely to make good decisions What Should Land Reform Include? than beneficiaries themselves in identifying the most appropriate land for transfer. In Amended Laws and Regulations Must Be some Latin American countries, bureaucra- Consistent with the Aims and Processes of cies decided to acquire land that had been Land Reform tenanted for more than three years, or was lying unused. The landed elite promptly Unless legal clarity is ensured, the scope for evicted all tenants with less than three years' disputes and delays will be enormous, and tenure, and started ranching unused land. coalitions of interests that oppose reform will be able to subvert the process. Excessive Limits On Renting and Selling Land Reforms Should Facilitate Voluntary Deals Between Willing Sellers and Buyers Countries like Mexico have attempted to re- ° W strict land sale or leasing to try and ensure A voluntary process is the best way of that only "genuine" farmers can operate. But avoiding disputes and delays that have even the most genuine farmers may need to plagued past reforms. Voluntary deals make mortgage their land to get credit, and mort- it more likely that the most inefficient large gages are not possible without an active farmers will cease operating, and that the market for land. Renting is an efficient strat- most enterprising and skilled poor farmers egy for widows or those handicapped in op- will be major beneficiaries. The task of erating land themselves; in such cases, rent- choosing what land is most suitable and at ing can increase productivity. The institu- what price is best done in a decentralized tional structure of settlements should be de- manner by buyers and sellers. termined by local communities, not central rules. 2 Governments May Give Partial Grants to will reduce the inflation premium on land, Poor Buyers and Provide Incentives for and encourages land speculators to sell their Appropriate Self-Selection land. Without grants, it is not possible to target the * Encouraging unviable farmers to cease poor, who lack money for outright purchases. operating through exit bonuses, government Besides, since the land price may contain an retraining schemes and subsidized loans for inflation premium even after structural ad- starting new businesses. These approaches justment, a grant is needed to reduce the net have been used successfully in Australia. purchase price to levels that make farming * The government should increase the sup- affordable and profitable. Better-off benefici- * of lanment own ings. aries can raise some equity for land purchase pl o l b from relatives, friends and their own savings, * If land supply needs to be increased fur- but need some assistance too. Since public ther, the government can subsidize or guar- works will be needed to develop infrastruc- antee pension schemes for farmers who want ture in land reform areas, small farmers can to retire. The income stream from such pen- contribute free labor as "sweat equity." sions should be close to that from farming, Grants can be up to 100 percent for small while being free from the risks and fluctua- subsistence plots, and then decrease on a tions inherent in agriculture. sliding scale for additional land up to a speci- * Lending agencies should place a cap on fied maximum, adjusted for land quality, the price (adjusted for quality) at which they Such cost-sharing will reduce the fiscal bur- will finance purchases. This will limnit any den on the government. It will also act as a wile fice warchasen beneficimit If self-selecting device that discourages land possible price war between beneficiaries. If sellecultig and encourages the most enter- the land price reaches the credit cap, this will speculators . . . be a signal to the government to take addi- prising families to acquire the maximum- tional steps to improve the supply of land. sized plots. Steps Must Be Taken To Improve the * As several tools are available to promote Supply of Land market-assisted reform, it will be prudent to use only some to begin with, keeping the MALR implies a significant increase in the others in reserve for use if problems arise. demand for land that will drive up prices to prohibitive levels unless prior steps are taken oubstantial Public Investment In Land to increase the supply of land. The best ways Reform Areas Is Essential of doing so are: The reforms will fail unless they are supple- * Abolishing subsidies, tax breaks and mented by public investment in roads, water, other farm privileges. The resultant decline in social services, extension, credit and mar- farm profitability will translate into falling keting facifities. These are essential for help- land prices, and inefficient large farmers with ing family farms reach their full potential. In substantial debt burdens will cease operat- densely populated Asian countries, the large ing. estates of old were usually tenanted, and land reform was relatively simple since the * Implementing structural adjustment, tenants already had the requisite skills and which typically results in less protection knowledge of local conditions. However, against imports and high interest rates, both thinly populated mechanized farms are of which will tend to drive out inefficient common in other parts of the world, and the large farmers. In high-inflation countries local population is not sufficiently large to people buy land as a hedge against inflation, settle the entire area as family farms. People e.g., one study has estimated that 28 percent from outside must be brought in to settle the of the rise in land prices in Brazil is due to an land. However, settlers often lack the neces- inflation premium. Macroeconomic stability sary skills and local knowledge, so farm ex- 3 tension and infrastructure development are and awards is better than supervision particularly important. The government through detailed step-by-step clearance, should create appropriate conditions for set- which leads to delay, waste and corruption. tlers to set up new settlements through access to infrastructure. Fixed blueprints for the lo- cation and size of new settlements are un- likely to be appropriate. Local Communities Should Participate In Suggested Reading: Selecting Beneficiaries and Distributing Van Zyl, J., Kirsten, J. and Binswanger, H. Benefits 1995. Policies, Markets and Mechanisms for Beneficiaries are better at selecting partici- Agricultural Land Reform in South Africa pants and distributing benefits than govern- (Cape Town: Oxford University Press). ment agencies, which are sometimes ineffi- cient or corrupt. The reforms will necessarily This Dissemination Note has been prepared by be spread over several years, and communi- Swaminathan Aiyar, Andrew Parker and Johan ties will be better than bureaucracies in pri- van Zyl under the supervision of Hans Bins- oritizing beneficiaries, supervising grants, wanger, Senior Agricultural Policy Adviser, Of- and setting rules for the functioning of set- fice of the Director. tlement areas. Criteria should be evolved for choosing beneficiaries, like farm experience, gender and poverty level, and these can be consolidated into a points system. Individu- als and groups with the highest points can be prioritized for receiving grants. Local com- munities are best placed to screen out false claims and supervise beneficiary selection. Local Communities Should Get Powers to Raise Taxes and Plan and Implement Local Projects The development of infrastructure and social services is essential, and local governments are likely to do the job better than centralized agencies. They are better suited to raising lo- cal taxes, but will also need revenue transfers and matching grants from the national gov- ernment for the formidable task of develop- ing new settlements. Global experience sug- gests that the enthusiasm and creativeness of elected mayors is more important than tech- nical expertise in creating local capabilities, and that technical assistance should be driven by local demands, instead of being imposed by central agencies. Emphasize Supervision Through Monitoring, With Penalties for Those Breaking Rules and Awards for Those Who Do Well A properly monitored system of penalties 4