Land Rental Markets in the Process of Structural Transformation: Productivity and Equity Impacts in China Songqing Jin and Klaus Deininger World Bank

Outline Background Key Questions Conceptual Framework & Hypotheses Data and Methodology Main Results Conclusions

Motivation Past studies have focused on the efficiency nature of alternative rental contracts taking the decision to rent as given, often under the environment of multiple market imperfections and (at least implicitly) an unequal ownership distribution of land. With economic environment changes (i.e., rural non-farm opportunities), there is increasing potential for efficiency- enhancing rental even in a rural economy with equal land distribution. (In china, share of migrants 5% in 1988, 10% in 1998, 17% in million internal migrants). Productivity impact was not well measured in the past studies mainly due to data availability. Data from both parties of rental transaction allow us to explicitly measure such impacts.

Key Questions How do non-farm employment opportunities affect rental markets? Do land rental markets help reduce poverty and increase productivity? Does the current rental markets realize their full potential? What are the key factors prevent rental markets from performing at their full potential?

Model Setup  Household is endowed with fixed amount of labor ( ) and land ( ), and an exogenous level of agricultural ability (  i )  Household divide its own labor endowment between farm work and off-farm wage employment  No farm labor market, renting of land incurs transaction costs  3 sources of income: agricultural production, wage income and rental income.  Households maximize total income by optimizing labor allocation and choosing optimal operated land size through land rental markets

Conceptual framework FOC For tenants: For Landlord: For Autarkic household:

Propositions Rental markets transfer land to “land-poor but efficient” producers. Increase in transaction cost will expand the autarky range, thus reducing the number of producers participating in rental markets. Increases of off-farm employment wage will increase total rental supply and lower equilibrium rental rate.

Innovations in estimation Analytically, we use data collected from both parties to test the predicted impacts of rental markets Econometrically, we use an ordered probit model (OPM) to test the propositions derived from the model Agricultural ability is explicitly included in regression Transaction costs enter into threshold equations

Data sources  A sub-sample of NBS’ regular consumption survey  8000 panel households, 800 villages, 9 provinces, 2002 to 2004  Detailed info on demography, assets, income, expenditure, agricultural production and rental participation.  A follow up survey administered to those who were actually involved in land transactions  detailed info. on contract arrangement, net revenue obtained from the land before/after transfer, occupation status and income level for both parties involved.  A 2003 Village Survey  Migration, Village income, land endowment, share of households with land certificate, land policy arrangements such as land use regulation and restrictions.

Descriptive Evidence  Rapid emergence of rental markets 13% (10%) rented in (out), with great variation across regions  Migration most active in centre and SW where rental markets tend to be most active as well  Explicit and implicit rental restrictions still in place

Characteristics by rental status?  More land less labor rent out, less land and more labor rent in  Poor (income/asset) rent in, rich rent out  More productive households rent in  higher share of income from non-farm (i.e., higher in all categories of migration, local wages and self-employment) rent out

Analytical results: productivity and structure impact  Significant improvement in productivity (figures from tenants and landlords are surprisingly consistent) Gain 267 and 283 Y/mu, accounting for >80% net revenue increase, and 55% gain after overall productivity gain are controlled for, 2/3 of total gains to tenants and 1/3 to landlords  Rental markets bring about considerable occupation shift Vast majority of landlords (57%) derived main income from agri, followed by local non-farm (23%) and migration (20%) before renting out only 17% relied on agriculture for main source of income, 55% derived main income from migration and 29% from local non-farm after renting out

Analytical results: welfare impact  Significant welfare improvement to both parties: 45% of landlords moved up their income level by at least one category, 54% remained in the same category and only 1% moved down. Share of households in the bottom income group dropped by 20 percentage points from 30% to 10% after renting out. Although 2/3 of tenants remained in the same income category, 1/3 moved up and only 1% moved down. The share in the poorest group declined from 21% to 10%

Analytical Results: Remaining Constraints  40% demand-constrained, and 12% wanted to supply more in the past  45% (or 23%) not confident about renting in (out) desired amount of land in the future though 80% perceived passage of RLCL made transfer easier  40% (31%) rented in from (out to) relatives, 60% of transactions have contract, only 10% written, about a quarter with fixed term  Net gain from renting to non-relatives is almost 80% higher than renting to relatives.

Econometric Results  Rental markets tend to transfer land from land abundant and labor poor households to those with little land and large amounts of labor  Poor and more efficient households received land through rental markets  Off-farm opportunities increase supply of land  Migration encourage rental market participation, rental restrictions reduce participating in renting out, but not renting in  Possession of land certificate increase rental participation

Conclusions and Policy Implications  Rental markets increase productivity and tenants’ welfare by 60% and about 25%, and even larger increases in landlords’ income  The potential for rental markets to contribute to the rural economy is very significant in the situation of rapid structural changes, even in the environment with very equal land endowment  Although reform has helped increase tenure security and improved the functioning of rental markets, tenure insecurity issue remains