Overview of Land Tenure Issues in Asia and Illustration from the Philippines Kei Otsuka In Beijing on January 25, 2010

References K. Otsuka, “Efficiency and Equity Effects of Land Markets,” in Handbook of Agricultural Economics, volume 3, Robert Evenson and Prabhu Pingali (eds.), Elsevier, K. Otsuka et al., “Permanent Labor and Land Tenancy Contracts in Agrarian Economies: An Integrated Analysis,” Economica 60 (237),1993. K. Otsuka et al., “Land and Labor Contracts in Agrarian Economies: Theories and Facts,” Journal of Economic Literature 30 (4), 1992.

What are the major issues? Market Failures and Government Failures So far focus has been placed on market failures, e.g., analysis of Marshallian inefficiency of share tenancy, inverse correlation between farm size and productivity (e.g., yield per ha), and the role of imperfect credit markets. -- Problem: the analyses have been made independently. -- Remaining issue: we need solid studies of government failures, because land tenure policies are exrtremely interventionist in Asia, e.g., land rent regulations and the land transfer programs. -- Problem: market and government failures have seldom been analyzed jointly in the empirical analysis.

Marshallian Inefficiency A B C 0 Marginal product of effort Tenant’s share of marginal product of effort Tenant’s total marginal gain D E* e* E** E′E′ Labor supply Work Effort e**e′e′

Puzzle of Marshallian Inefficiency It is found in some parts of India, where land-to-the tiller program was implemented (e.g., Bell and Shaban). In such area, landlords rotate tenants season after season to evade the land reform implementation, that thwarts the work incentives for share tenants. -- Problem: Possible policy effects should be taken into account in the assessment of the Marshallian inefficiency. Significant Marshallian inefficiency has seldom been found in other areas of Asia, where tenants and landlords are closely related by trust under stable long-term contractual relationship. -- Problem: We should not compare yield of large owner- cultivators with that of small share tenants.

Yields of large owner-cultivator, small owner- cultivator, and small share tenants: A hypothesis Large owner- cultivator Small owner- cultivator Small share tenants

Declining Importance of Share Tenancy in Asia and Its Absence in China and SSA Changes in % of share tenancy Bangladesh: 91.0% in 1976/77  73.0% in 1996 Philippines: 79.3% in 1971  67.8% in 1991 Thailand: 32.3% in 1978  19.2% in 1993 Dominance of short-term fixed-rent tenancy in China and SSA except in Ethiopia and Madagascar -- Hints: Absentee owners prefer fixed-rent. Tenure insecurity leads to short-tem fixed-rent contracts. But these cannot explain major regional difference in the choice of share vs. fixed-rent tenancy between Asia and SSA.

Inverse correlation between farm size and productivity: Why don’t large farms rent our land to small farms? Inputs and yield per ha Purchased Inputs / ha Yield / ha Labor / ha

Puzzle of inverse correlation It is commonly found in South Asia but seldom found in Southeast Asia, except in Central Luzon where land reform has been strictly implemented, so that tenancy contracts are suppressed. -- Hypothesis: Inverse correlation is found where land tenancy markets are suppressed due to land reform regulations or land tenure insecurity. -- Evidence: In areas where the inverse correlation is found, large farms tend to employ “permanent” (seasonal) workers. Theoretically permanent labor contract cannot be justified unless the option of tenancy contracts is suppressed (cf. Eswaran and Kotwal 1985). -- Another evidence: Inverse correlation is found in China (Kimura et al., EDCC 2010).

Story in Central Luzon Serious political unrest due to large landlordism in Central Luzon Land reform implementation in the 1970s Change in % of permanent laborer households among landless laborer households in a Central Luzon village 15% in 1970, 36% in 1987, and 65% in 2008 Significant inefficiency of cultivation by permanent labor compared with others in We can use larger sample in 2004 and 2008 than in We can also test the existence of inverse correlation between farm size and productivity.

Concluding Remarks We must recognize interdependence and interrelationships among (1) efficiency of share tenancy, (2) the choice of tenancy contracts, (3) inverse correlation between farm size and productivity, (4) land reform regulations and land tenure insecurity, and (5) employment of permanent labor. It is also important to assess the equity effects of land reform regulations and land tenure insecurity, as tenants are usually much richer than permanent laborers.