Chapter 18 – Policies Aimed at Raising the Income of the Poor

I. Land reform A. Attempt to change the land tenure system through public policies 1. Usually referring to changing land ownership or changing right to use land

2. In countries that were socialist, land reform means breaking up state-owned and run farms and giving (or selling) the land to individuals

3. In capitalist countries, land reform means taking (buying) land from large, underused farms and giving the land to the landless or small farmers a. May be breaking up corporate farms or farms owned by wealthy individuals

II. Source of many land ownership patterns found in LDCs A. Started during the colonial period in: 1. Central and South America 2. Africa 3. Asia

B. Political power of the “landed elites” has maintained these land ownership patterns

1. Land ownership in the Third World is typically concentrated a. Indian village – 20% of households own 76% of land b. Columbia – 10% of owners control >80% of farmland c. Zimbabwe – whites make up 2% of population and own 70% of the nation’s best land

III. Goals of land reform A. Improved income growth 1. Large landholdings hinder efficiency improvements a. Large farms are not farmed intensively - getting the most from as little land as possible

b. Large farms substitute machinery for labor, even though unemployment is already high, because they don’t want to supervise the labor (may be absentee landowners)

2. Productivity (output per acre) could increase because: a. Productivity is typically higher on smaller farms b. Landowner motivated to work longer hours than sharecropper c. Insecurity of land tenure discourages capital improvements on the land (fences, irrigation, fruit trees)

B. Better income distribution 1. Farms may be too small to provide an adequate living.

2. The only resource controlled by the landless is their labor a. Lack of demand for labor on large farms increases unemployment forcing wages down b. Giving land to the landless helps raisetheir incomes

c. Even the landless who do not receive land benefit by the increase in demand for labor that comes from a decline in the number of large capital-intensive farms and an increase in the number of small farms that hire more labor

IV. Why land reform is difficult to achieve A. Landowners are often the ones with political and economic power making land reform difficult

B. Historically, most land reforms have come about violently as the result of revolution, overthrow of colonizers, or war C. Occasionally governments have supported peaceful land reform

D. Land reform is slow and expensive in countries that have a capitalist system because landowners have to be compensated

V. Disillusionment about land reform A. Unforeseen consequences have sometimes made land reform unsuccessful 1. Communist China eliminated private ownership of land but agricultural production stagnated, so in the 1980s some private ownership was reinstated

2. Algerian land reform resulted in decline in agricultural employment as new owners reduced labor needs

3. Burma’s land reform required land to be worked to be owned resulting in absentee owners working the land themselves and making landless laborers of the former tenant farmers

4. Philippines’ land reform gave the land to those who had sharecropped it for 3 or more years. This hurt the ability of landless workers to acquire land through sharecropping in the future.

B. One study concludes that other things are more important in determining farm productivity than who owns the land 1. Availability of low-cost inputs 2. Good prices for farm products 3. Appropriate technical assistance 4. Paved farm-to-market roads

VI. Measures of successful land reform A. Just because a change has taken place does not mean land reform has been a success

B. Measures of success 1. Incentives have been created for farmers to: a. Increase their productivity b. Invest in their farms

2. Poverty is reduced for the rural poor 3. There is an increase in investment in rural infrastructure

C. Success of a land reform should be measured over the long run 1. Investments by small farmers take time 2. Takes time for the supporting institutions to change

D. Land reform is a failure if small farms are quickly consolidated into large ones

VII. Needed for a successful land reform A. Sincere desire for reform in the government needed (incorruptible leaders)

B. Government has enough power to thwart the opposition 1. Government policies (tax exemptions, credit policies, input subsidies) should not favor large farms

2. Reform must be fast and by a central authority a. If land reform is announced, but not instituted right away, land owners may remove assets b. Reform agency needs to be removed from local influence

3. Institutions/systems (marketing, credit, technical information, inputs) need to be adjusted

VIII. Taxation as income distribution policy A. Taxes that take a greater percentage from the rich than the poor are progressive 1. Income taxes in developed countries are usually progressive a. Tax rate goes up with income (28% vs. 15%)

B. Taxes that take a greater percentage from the poor than the rich are regressive 1. Sales taxes tend to be regressive because the poor spend more of their income than the rich

2. In the Third World a sales tax can be progressive if the poor spend very little and instead barter and raise their own food

C. Taxing land according to use- value encourages efficient use of the land or sale of the land to farmers who will use it efficiently

D. How tax money is spent also influences income distribution 1. Programs that increase agricultural production help the poor by lowering the price of food and/or increasing employment in agriculture

IX. Minimum-wage laws A. Help those who are covered

B. Can motivate employers to substitute capital for labor causing an increase in unemployment C. Enforced more in urban areas – increasing motivation for rural to urban migration

X. Economic growth A. Creates jobs and raises the incomes of the poor

B. Comes from: 1. High savings leading to increased capital stock 2. High labor productivity 3. Adoption of new technology

C. Policies for economic growth 1. Promote savings & investment through good macroeconomic policies a. Low inflation Encourages saving Need central bank independent from politics

b. Low budget deficits Government budget deficit comes from government spending > government income Deficits covered by borrowing “crowd out” private investment Deficits covered by printing money cause inflation

c. Stable exchange rates Attract foreign investment

2. Promote labor productivity through education, health, and antipoverty programs a. Makes workers better able to do their jobs

3. Promote appropriate incentives for economic decision makers through markets a. Prices determined by markets provide incentives to producers & consumers

High price  produce more / consume less Low price  produce less / consume more

b. Policies that promote markets Openness to free trade and world markets Property rights that let individuals buy and sell goods, resources, and services Government regulations that operate through the price system No government price setting

4. Promote increased productivity in agriculture a. Agriculture is most important sector of the economy in LDCs Majority of people employed in ag Ag makes up biggest percentage of GDP

b. Increases in ag production: Increase ag employment Lower the price of food

c. Lower price of food keeps down wages Industries with lower wages are more competitive

d. Lower price of food means people have more money to spend on other things, increasing their demand for these things

e. Ag production can increase if: Government invests in ag research and ag education Ag production disincentives (e.g. low prices set by government) are removed