1. Shahe Emran and Forhad Shilpi March 15, 2016
Do Land Market Restrictions Hinder Structural Change in a Rural Economy?: Evidence from Sri Lanka
Shahe Emran and Forhad Shilpi
March 15, 2016

2. Labor Market Dualism and Structural Change
Labor market dualism in developing countries
Moving people of out of agriculture will have large poverty and growth impact
Do land market restrictions contribute to this dualism?
We construct a model to identify the channels through which land market restrictions can affect structural transformation focusing on its effect on migration costs
We provide evidence using data from Sri Lanka
Considerable empirical literature shows that labor productivity is higher in non-agriculture and that moving people out of agriculture will make a significant dent in poverty

3. Literature on Land market restrictions
Three mechanisms through which impacts are mediated:
Security of property rights:
Insecurity Affects longer term and irreversible investments adversely (Besely (1995), Deininger and Jin(2006), Holden et al (2007), Iyer and Do (2008))
Improvement in the security of property rights => increased labor supply (Field (2007) on Peru, Iyer and DO (2008) on Vietnam, Iyer et al. (2014) on China)
Credit Market Channel: Formalization of property rights in land => increased collateral value (Feder and Feeny (1988) and de Soto(1989)) => not much supporting empirical evidence on this
Migration channel: Sales restrictions on land =>increase migration costs (Hayashi and Prescott (2008), Emran and Shilpi (2015), de Janvry, Emerick, Gonzalez-Navaro and Sadoulet (2015))

4. Conceptual Framework
Construct a two sector model: agriculture (uses land and labor) and non-agriculture (uses labor and capital)
Consider the case where property right is secured but land can not be sold
Land sales restrictions => households lose land in case of migration => increased migration costs => lower migration
Predictions of the model:
Share of employment in non-agriculture decreases:
if non-agriculture is traded (e.g. manufacturing)
If non-agriculture is non-traded (e.g. services), but its demand is income inelastic (more plausible for locally produced goods and services)

5. Detecting Mechanisms
The same predictions can be derived from destruction of collateral value of land due to sales restrictions => lower collateral value => less access to credit => less entrepreneurship in non-agriculture => less employment in non-agriculture
The channels can be distinguished by noting that
Credit channel will have no impact on spatial distribution of rural wage if migration cost is not affected
Migration cost is important => wage decline with an increase in the share of land under restrictions
Higher migration costs => less out migration
Empirical analysis using data from Sri Lanka

6. Historical background of land restrictions in Sri Lanka
Government is the largest owner of agricultural land – as a byproduct of its colonial history
Crown Lands Encroachment Ordinance of 1840: Transferred land rights of all lands without private title to British Crown. Some of these lands were sold to plantation owners for coffee plantation. No coffee production in Sri Lanka since 1880
Land Development Ordinance (LDO) of 1935: Crown Lands were made available to private users with restrictions on sales, leasing, mortgaging, sub-division, unitary succession, abandonment or failure to cultivate etc. Much of the lands were distributed during post independence period under different settlement programs which built basic infrastructure (esp. irrigation, roads etc)
People from South were resettled in these lands

7. Empirical Challenge
Unobserved land productivity: one would expect land under restrictions to be less productive since more valuable lands tend to have more secure private rights: That’s not the case for LDO lands which are more productive due to irrigation
Unobserved differences in labor productivity: This could be a source negative correlation between land under LDO restrictions and rural wage, but no evidence of that as well
Measurement errors in LDO variable

8. Historical Malaria as natural experiment
Malaria incidence: 13-16th century, people abandoned malaria infested areas which later became “crown lands”. Current incidence of LDO lands historically determined by intensity of malaria and hence can be used as an instrument
Malaria eradication technology became available after discovery of DDT
Malaria was eradicated by Spleen rate during used as an instrument
Centralized government and institutions do not vary by sub-districts
Current residents in LDO areas came from relatively malaria free South

11. Empirical Results
Proportion of Land under Restrictions and Out-Migration: Population Census 2012