Land Market Mechanisms and the Rural Poor

The main barrier to increased land ownership on the part of the rural poor is imperfections in financial markets, i.e. lack of mortgage finance. A barrier to their retaining the land is the lack of adequate mechanisms for insuring against risk. Associated with the financing problem there is another barrier in the form of the price of land. It has been pointed out by Binswanger et al. (1995, pp. 2710-2711) that the price of land is always greater than its expected returns (in the form of a discounted stream of annual returns) because it has other sources of value: a guarantee for obtaining credit (even for uses unrelated to the land), and prestige which can translate into political influence. Hence, for a farmer who wants land for purposes of production, purchasing it at market prices with financing often is not a viable option, for the annual cost of servicing the mortgage may be greater than the annual profits from using it. In addition, if the land were to be fully mortgaged, then it could not be used as collateral for production credit to obtain modern farm inputs.

Under most circumstances, a poor rural family without financial resources would not be able to purchase land. This fact accounts for the widespread recourse to State land development schemes, under which new land is made available to settlers at little or no cost. Along with the historical concentration of landholdings in many countries, it also explains why so many expropria-tive agrarian reforms have been carried out.

Can access to land for poor families be improved in the context of land markets? Attempts are underway all over the world to promote access to land for the rural poor via market mechanisms. Some of them are promising, but to keep matters in perspective it should be noted that to date 'there are few experiences where land markets have been used successfully for small peasants' land purchases. Lack of capital and unfavorable access to credit hamper the possibilities of land purchasing for these peasant groups'.218

Basically, there are nine possible approaches to improving access to land in a market setting, and they can be implemented individually or in concert. These are described in the following sections.

5.9.1.1 A Land Fund or Land Bank

A land fund or bank operates in land markets, facilitating the purchase of holdings that are for sale, often in the form of smaller parcels, by qualifying low-income families. It operates on the basis of voluntary sales by landowners. John Strasma has pointed out that land funds should not be government entities, nor should they become directly involved in the purchase and sale of land.219 Direct governmental involvement in a land fund generates political pressures on it to offer an attractive price to large landholders that are selling and virtually makes its situation untenable. A temporary land bank that was created in El Salvador, to help honor the commitments of land that were made to ex-combatants at the end of the civil war, was government-owned and directly bought and sold land. Its President admitted to this author that he encountered difficult pressures of this nature.

Land funds are most effective if they operate as second-storey institutions, refinancing the land transaction. In this manner, they can operate

219. John Strasma, Analysis of Land Markets and Land Banks', in Instituto Nacional Agrario and Land Tenure Center of the University of Wisconsin, Seminar on Access to Land, Tenure Security and Investment in the Productive Use of Natural Resources, Tegucigalpa, Honduras, 1990, in particular, pp. 32 and 33.

through a wide variety of intermediaries, including banks, non-bank financial institutions, NGOs, and even large landowners who decide to sub-divide their land and sell it. Non-financial institutions would have to post bonds as guarantees of their performance.220

A necessary condition for a land bank to function successfully is a source of subsidy. For the reasons mentioned above, low-income rural families cannot be expected to purchase land at market prices, and therefore a subsidy element must be planned in the operation of the land bank, and its source of financing correspondingly identified. Principal options include revenues from sale of State lands, revenues from land taxes, the regular government budget and contributions by international development organizations. The subsidy is translated into lower mortgage payments for those who acquire the land, or lower down payments or both. It is considered important that recipients of land pay something for its acquisition, if nothing else so that they may value the land psychologically, and also to reduce the temptation to realize windfall gains by selling the land received through such a program. Deininger and Julian May have commented that, in the context of market-assisted land reform in South Africa, requiring a contribution from beneficiaries does not appear to discriminate against the 221

poor.221

So far, there are few cases of land funds in operation. The FAO has noted that 'Land funds experiences in Ecuador, Colombia, Brazil and Guatemala are presently trying to develop support strategies to facilitate land purchasing and land cultivation by the rural poor'.222 Honduras is initiating an effort in this direction also, with external funding for the subsidy component.

Gustavo Gordillo de Anda has analyzed the experiences with land funds in Guatemala (FONTIERRA) and El Salvador (Banco de Tierras). His findings reinforce the points that contributions by beneficiaries are important, and therefore these instruments probably cannot assist the very poorest families in rural areas; that community organization is an important prerequisite for the functioning of land funds; that titles to the properties should be completely clear before they are transferred to the beneficiaries; and that these kinds of programs can be expensive:

Lessons learned from FONTIERRA: In principle . . . not all poor farmers are eligible to be beneficiaries of this program. Only those who fulfill certain characteristics (certain level of capitalization at the moment of entering the program, substantial degree of organization in community groups, experience with profitable crops) qualify to participate in the program.

.. . the program appears to respond to a specific type of farmer who is not necessarily the poorest, which suggests the necessity of other types of programs to meet the needs of the poorest rural population. .. . Owing to the relatively high cost of the program, it is clear that its potential coverage is limited. . ..

Lessons learned from the Banco de Tierras in El Salvador: .. . those [farmers] who lack resources and access to support networks would find it difficult to take advantage of the distributions of land From the perspective of property rights, the transfer of lands without previously 'cleaning up' their legal status creates serious difficulties at the moment of subdividing and titling the new plots in favor of the beneficiaries.. . . [which] illustrates the

220. Many of the operating concepts of a land bank can be found in John Strasma, Ricardo Arias, Magdalena Garcia, Daniel Meza, René Soler and Rafael Umaña, Estudio del Diseño Conceptual de un Fondo de Tierras en Honduras, prepared for the Government of Honduras, Proyecto APAH, Tegucigalpa, Honduras, 1993.

221. Klaus Deininger and Julian May, 'Is there Scope for Growth with Equity? The Case of Land Reform in South Africa', mimeo, The World Bank, Washington, DC, USA, January 2000, p. 18.

importance of strengthening the institutions linked to land administration (cadastre, property registries). . . .223

5.9.1.2 Market-Assisted Land Reform

Market-assisted or negotiated land reform is similar to the operation of a land fund, but it encompasses a broader range of options. The subsidy for land purchase may be given directly to poor families, instead of being channeled through a financial institution in the form of lower mortgage payments. In addition, the community may participate in selection of the lands to be sold, and in carrying out the negotiations with the owners. Land sales are voluntary but clearly there exists the potential for an element of local pressure to sell to be placed on some landowners. Another feature of market-assisted land reform is that beneficiaries may be required to submit a proposal for development of the farm to be purchased, and credits or grants may be given for investments on the farm, as well as for its purchase.

Deininger (1999) has written a detailed but preliminary review of three experiences in negotiated land reform, in Colombia, Brazil and South Africa. In the Colombian case, up to 70% of the value of the land purchased may be subsidized -20 % in cash and 50 % in bonds. In South Africa, a grant of up to R15000 is provided for the purchase, although consideration is being given to increasing that amount substantially. Special emphasis is placed in Colombia on the development of a viable farming project proposal, and it is a condition of selection of the beneficiaries. In both Colombia and Brazil, the subsidy element of the land purchase is channeled through a commercial bank, as in the case of land funds.

The purposes of market-assisted land reform go beyond simply redistributing land. Deininger has drawn out some valuable lessons from these early experiences of the three countries:

(a) land reform through negotiation can only succeed if measures are taken to make the market for land sales and rental more transparent and fluid;

(b) productive projects are a core element of market-assisted land reform [since it should be] designed to establish economically viable and productive projects at a socially justifiable cost rather than to transfer assets;

(c) the only way to achieve effective coordination of the various entities involved in this process is through demand-driven and decentralized implementation;

(d) the long-run success of land reform is likely to depend critically on getting the private sector involved in implementation. . ..

Other strategic findings in Deininger's research concern the importance of:

co-financing ... the land purchase through a private financial intermediary which, because it shares in the risk of default, will have an incentive to assess the economic feasibility of the proposed farming project [and the fact that] negotiated land reform is a complement, rather than a substitute for other forms of gaining access to land, especially land rental.224

The caution mentioned in Section 5.7, i.e. that any kind of land reform inevitably must proceed slowly because it depends on the development of institutional capacities at the local level, is applicable to market-assisted land reform. As noted above, in Colombia market-assisted land reform encountered a number of implementation problems, including difficulties in selecting beneficiaries, and effectively has come to a halt. Efforts to

223. Gustavo Gordillo de Anda, 'Un nuevo trato para el campo', paper presented at the International Conference on Access to Land: Innovative Agrarian Reforms for Sustainability and Poverty Reduction, Bonn, Germany, May 19-23, 2001, pp. 24-25 and 28-29 [author's translation].

strengthen administrative capacities at the local level would appear to be essential to further applications of this approach.

5.9.1.3 Improving Land Rental Markets

As earlier comments in the chapter indicated, rental markets offer important opportunities for poor farm families to increase their access to land, and they also favor increased productivity in farming. The advantages of improving rental markets, and the need to provide assistance so that poor families can participate in those markets, have been stated clearly by Alain de Janvry, Elisabeth Sadoulet and Karen Macours:

Land rental markets offer vast unused opportunities to attack poverty and improve efficiency. Access to land in rental is cheaper than through the land sales market and less politically demanding than access to land through expropriation. Making land rental markets work requires 'assistance' on both the supply and the demand sides of the market. On the supply side, more land will be offered in rental if security of property rights is increased, obsolete land reform legislation that threatens property rights is voided, and reliable conflict resolution mechanisms are put into place. On the demand side, special grants need to be made to poor and young potential tenants to qualify them for the land rental market and make land rental as attractive as land buying under community assisted land reform. Innovative schemes can be explored to enhance access to rental for the rural poor, such as group rental, rental with option to buy, provision of a menu of alternative contracts from which to choose, and the design of contracts that offer provisions to compensate for the residual value of investments made by the tenant. . . .225

Improving the functioning of rental markets in these and other ways represents one of the potentially most valuable, and least explored, ways of increasing access to land for the rural poor and, as these three authors emphasize, if properly carried out it will not weaken tenure security for existing landholders. Given the value of land rental for low-income farmers, it is all the more important to ensure that existing customary rental rights are protected when traditional lands are subjected to a titling program.

5.9.1.4 Lease-Purchase Contracts

This kind of contract was mentioned above in the context of long-term leases of State lands, and they also can be applied to the programs of a land fund or market-assisted land reform or other programs designed to endow low-income families with land. The provisions would specify that after a family has worked the land for a given number of years, the cumulative lease payments would be credited (retroactively) to the down payment on purchase of the land, and remaining lease payments would be converted into mortgage payments. The need for a subsidy content in the land price still applies under this option.

5.9.1.5 A Progressive, Area-Based Land Tax

Policy makers concerned about the presence of idle land sometimes advocate a tax on land that is unused. However, a tax designed in that manner would invite problems in its implementation. As John Strasma observed in a University of Wisconsin seminar on land tenure in Honduras, in practice a punitive tax on idle land would encounter serious difficulties because it would be subjective, would be difficult to implement, and would be less effective than a tax applied to all land because the latter avoids the need to pass judgment on the degree of effective cultivation.226

225. Alain de Janvry, Elisabeth Sadoulet and Karen Macours, 'Land Policy and Administration: Lessons learned and new challenges for the Bank's development agenda', comments provided to the World Bank, Washington, DC, USA, March, 2001, p. 4.

226. John Strasma, Analysis of Land Taxation', in Instituto Nacional Agrario and University of Wisconsin Land Tenure Center, 1990, p. 42.

Assessments of the market value of rural lands are equally subjective in practice, and the arbitrariness of the assessments has been a major hurdle to the widespread implementation of a rural real estate tax. An alternative is a tax on all agricultural land, based on size of holding, and such a tax could be made progressive by exempting from taxation the first few hectares of each holding. The usefulness of this type of tax in stimulating an intensification of land use has been widely recognized; for example, in Bulgaria it was found that:

There is . . . evidence that some owners will seek to hold land not for productive purposes but as an asset and a hedge against inflation. For this reason a land tax may be necessary to encourage the sale of such land.227

In Latin America:

Because land taxes were low or difficult to collect, land was not farmed and was held for speculative purposes in Brazil and Costa Rica.228

Plus, in general:

Heavy taxes on land . . . may induce more efficient utilization of existing assets and raise the level of output, while at the same time reducing inequality. The importance of such arguments can be determined only by a close examination of the situation in each particular country.229

The potential for a land tax to encourage a redistribution of land in favor of the rural poor has been noted by John Strasma and Rafael Celis:

An annual tax on rural land. ... is a fixed expense that raises the cost of holding property idle for speculation. Any significant tax [rate] is relatively onerous to an owner who earns little income from his land. If he invests and works to increase its productivity and income, the land tax does not increase, so the burden becomes relatively lighter.. . . The . .. tax should encourage owners to rent or sell land from which they derive little income. The increased supply of land will naturally depress land prices or make sellers offer better terms. As a result, the relatively poor will find it easier to buy or rent land with which they can raise their income by much more than the yearly tax.

The land tax also is preferable to a tax on agricultural production or exports, from the government's point of view. Most tax incentives cut revenues. Land taxes can generate substantial revenues - yet they do not penalize the most productive, as do taxes on agricultural commodities or exports.230

Similar observations have been made by Mohan

Rao:

An interesting possibility is that the tax raises the yield of land and improves economic efficiency. This is based on an inverse relationship between farm (landholding) size and land yield that is generally observed in underdeveloped agriculture. The land tax may compel large farms to improve yields or to transfer - through sale or lease - their land to medium-sized and small farms. Whether such effects will occur will depend on whether the tax can modify the factors causing the lower yields. Credit constraints on smaller farmers and the noneco-

228. The World Bank, Renewable Resource Management in Agriculture, Operations Evaluation Department, The World Bank, Washington, DC, USA, 1989, p. 37.

229. Bird, Richard M., Tax Policy and Economic Development, p. 9, Copyright (1992), The Johns Hopkins University Press. Reprinted with permission of The John Hopkins University Press.

230. Reprinted by permission of Transaction Publishers. 'Land Taxation, the Poor, and Sustainable Development', in S. Annis, O. Arias, J. B. Nations, S. B. Cox, A. Umana, K. Brandon, S. K. Tucker, J. D. Strasma and R. Celis (Eds), Poverty, Natural Resources and Public Policy in Central America, by John D. Strasma and Rafael Celis, pp. 149-150, 1992. Copyright (1992) by Transaction Publishers.

nomic behavior of larger ones are two factors that may respond to the tax.231

A skeptical view of the potential of a land tax to encourage a redistribution of land was put forth by Binswanger et al. Their first argument consists of citing a study for India which concludes that a land tax will increase the concentration of landholding, because in bad years the poor may be forced to sell land to meet the tax obligation.232 However, that study did not take into account the option of exempting the first few hectares of each farm from payment of the tax, and therefore would not be applicable for such a variant. Their second objection is that 'dummy divisions of their holdings' by landowners would diminish the effectiveness of a progressive tax. There always would be an incentive for such evasion but if, say, the first 5 hectares are exempt from payment of the tax, it would be very costly to make sufficient fictitious divisions of a 500-hectare holding to substantially lighten the tax burden. Thus, while the effect of the tax could be attenuated somewhat by evasions, the tax would still be expected to operate in the direction of encouraging intensification of land use and some sales of parts of the less efficient large holdings.

In light of the struggles, sometimes violent, and policy distortions that have been associated with land reforms in many parts of the world, their third argument - 'it is not obvious why such an indirect approach would be politically more acceptable than direct redistribution of land' (p. 2724) - must be regarded as unsupported by empirical research. Finally, their fourth argument (ibid.) is that administering a land tax is likely to be very costly. A response to this argument is that a per hectare tax (area tax) is much easier to apply than an ad valorem tax, especially if relatively few categories of land are defined, in order to avoid disputes over the classification of a parcel. Cadastral surveys and land registration systems are pro ceeding in many countries, and local land taxes exist (usually at low rates) in a large number of countries, and so administratively the step to a land tax applied on a per hectare basis is not larger than that associated with any other kind of tax. It can be argued that such an area-based tax would in fact be easier to collect than an income tax in rural areas, where record-keeping is almost non-existent. The land tax could be made deductible from the income tax obligation, and so for most farmers it would become the amount of income tax paid, de facto.

In spite of their objections, Binswanger et al. concluded that 'flat or mildly progressive land taxes based on rough classification of holdings may still be useful for raising revenue and providing some modest incentives for owners to sell off poorly utilized land'.233 In a more recent publication, they suggest a land tax could have wider benefits:

. .. governments can consider imposing a land tax and establishing land information systems. A land tax that is enforced at the municipal level not only could provide an incentive to large landowners to utilize their land more productively but could also make an important contribution to decentralization. On the one hand, a land tax is one of the few cases of a lump sum tax where - using asset, rather than production, values - the effective tax rate decreases as the income generated from land increases, thus encouraging more productive use of the resource. Several countries are currently experimenting with a land tax, either using a flat tax rate as in Nicaragua or basing land taxes on self-assessed values as in Chile. . .. Land taxes have proven very useful in a wide range of urban contexts in developing countries and - if accompanied by appropriate institutions to help with accounting and implementation - should be feasible in rural ones as well.234

231. J. M. Rao, 'Taxing agriculture: instruments and incidence', World Development, 17(6), 1989, p. 813.

234. K. Deininger and H. Binswanger, 1999, p. 265.

Strasma and Celis add that implementation of land tax would promote a clearer definition of property rights and, with exemptions for forested land, could be used to slow the rate of deforestation and encourage reforestation. They also note that such a tax could support the development of community infrastructure and help finance a land bank.235

They conclude that the main barriers to implementation of land taxes have been resistance by large landowners, lack of political will and indifference to the concept on the part of international development agencies, but that situation is changing, and 'the World Bank and some other aid agencies urged various countries to adopt land-tax reform as a tradeoff for lower export taxes and lower taxes on farm income'.236

Mahmood Hasan Khan, in a recent survey of agricultural taxation, makes the following observations about a land tax based on area, as opposed to one that is based on value of land:

The use of land area, with minor adjustments for differences in crops, soils, source of irrigation, as a tax base is convenient for administrative reasons. The major disadvantage is that land area, whether taxed on a flat or graduated rate, bears no relation to the land value as real estate or wealth. However, the assessment of 'fair' market or rental value of any property, particularly agricultural land, poses serious problems. ... In most developing countries, the cadastral requirements for property taxation, even in urban areas, are difficult to meet. A block or group approach to agricultural land can overcome some of the valuation problems and reduce the cost of administration. Similarly, as an alternative to regular assessment it is possible to use an appropriate price index as a guide to changes in the value of land.

. . . there are a number of tax options that governments can use to mobilize additional resources, provided that they can address the political and administrative aspects of tax reforms. In most developing countries, these constraints have hampered the development of a rational and equitable tax regime affecting those in the agriculture sector who own or control large areas and have been the major beneficiaries of public investment, input subsidies and credit programs.. . . Governments have, however, started taking steps to reform their tax systems as part of their structural adjustment and economic reform programs. Both internal and external political and financial pressures are apparently encouraging them to overcome the existing political and administrative constraints.237

Khan's survey shows that the following countries are now collecting a land tax in rural areas, based on size of holdings rather than value of property: Ethiopia, Bangladesh, India, Malaysia, Pakistan, Sri Lanka and Egypt.

An area-based land tax has the potential to raise revenue for rural development and other programs, to strengthen the revenue base of local government, to encourage more productive use of agricultural land, to encourage sustainable forest management (through exemptions for forested land), and to provide incentives for a redistribution of large landholdings to smallholders. The latter can be facilitated by the operation of a land fund or market-assisted land reform which will subsidize the purchase of land by poor families. It is not possible to make a proper assessment of the contributions of an area-based land tax in these domains, since there has not yet been much cumulative experience with a systematic application of the approach - with few differences in category of land for tax rate purposes, exemptions for small farms, and no other loopholes. In light of its potential benefits, it is likely to be explored by an increasing number of countries. It is an approach

235. See the summary of their paper on p. 39 in the cited volume edited by Annis et al. (1992).

236. Reprinted by permission of Transaction Publishers. 'Land Taxation, the Poor, and Sustainable Development', in S. Annis (Ed.), Poverty, Natural Resources and Public Poverty in Central America, by John D. Strasma and Rafael Celis, p. 151, 1992. Copyright (1992) by Transaction Publishers.

237. M. H. Khan, Agricultural taxation in developing countries: a survey of issues and policy', Reprinted from Agricultural Economics, 24(3), pp. 525 and 527, Copyright (2001), with permission from Elsevier.

worth pursuing more assiduously, but it must be stressed that its implementation requires considerable political will. The FAO's Land Tenure Service has commented on the lack of success of several experiences with land taxes, owing to the political factor. It also points out that in Brazil 'new regulations for a rural land tax .. . were approved by the Congress in December 1996. With a stronger political support, the Government is now enforcing the application of the [land tax]'.238

Table 5.2 Productivity of land by farm type in Estonia (data from National Strategy for Sustainable Agricultural Development, Ministry of Agriculture, Tallinn, Estonia, 1997, Chapter 3, Table 3.9)

Type of farm

% of arable land

% of gross

in productiona

agricultural output'

Household plots

22.2

34.0

Private farms

29.9

17.6

Farm enterprises

48.0

48.4

a As of January 1996. b For 1995.

a As of January 1996. b For 1995.

5.9.1.6 Titling Small Farms

In some cases, one of the barriers to property ownership for the rural poor has been legislation which prohibits the granting of title to small farms. In Honduras, for example, until the Law for Modernization and Development of the Agricultural Sector was passed in 1992, it was expressly forbidden to title farms with less than five hectares of land, even though the vast majority of farms in the country fell into that category. The result was to place smallholders in a category of second-class citizens, without access to the property rights enjoyed by their more fortunate neighbors.

In Estonia, the existing land reform legislation does not provide for titling the household plots, or former subsidiary plots of the State and collective farms. However, such plots are significantly more productive per hectare than either the large farm enterprises (direct successors to the State and collective farms) or the newly constituted private individual farms, as shown by the data presented in Table 5.2. Similar figures could be cited for many countries (see the example of Hungary above). The smallest farms (household plots) achieve their greater productivity in part by specializing in high-value crops, but that does not diminish their achievement. Failure to title them makes it more difficult for this class of farmers to emerge from poverty. It is sometimes argued that the household plots are too small to be technologically efficient, but they exist and they are economically efficient. They can be even more efficient with titling. Perhaps more importantly, titling them will set in motion a process of market dynamics which will lead to a gradual consolidation of the small units into larger ones, as some of their owners decide to leave for urban life, or as their heirs decide not to continue in agriculture. Without titling, and therefore without the prospect of realizing some economic benefits by selling the farm, such dynamics can hardly occur. In essence, it is a question of whether an 'optimal farm' size can be imposed on the private sector (in effect, by assuming the smallest farms will disappear without a full legal basis) or whether attaining that size should be left to market processes over time. It also is a question of designing poverty alleviation programs that increase the capacity of the poor to generate higher levels of income, and titling their de facto landholdings would be an important component of such programs.239

239. The consequences of a policy bias against small farms have been underscored by Binswanger: 'Communist countries as well as many market economies have paid an enormous price for assuming - without much empirical evidence - that large farms are more efficient than small ones'. (Reproduced from H. P. Binswanger, 'Patterns of Rural Development: Painful Lessons', in J. van Zyl, J. Kirsten and H. P. Binswanger (Eds), Agricultural Land Reform in South Africa: Policies, Markets and Mechanisms, Oxford University Press, Cape Town, South Africa, 1996, p. 20, with permission of the Oxford University Press, Southern Africa.)

While titling small farms does not provide expanded access to land to poor families, it does improve the quality of their landholdings and consequently their economic status. In implementing such titling programs, the remarks made earlier about the possibility of subsidizing part of the costs of titling should be borne in mind.

5.9.1.7 Alternative Financial Mechanisms in Rural Areas

Worldwide, there is increasing interest in new modalities of lending to the rural poor, and of loan supervision for those clients (see Chapter 7). While the value of land ownership as collateral has been mentioned frequently, it should be recognized that in reality, in many countries, the social and political context makes it difficult for banks to foreclose on small farms. In any event, to pursue that option 'opens a huge avenue leading to landlessness and land concentration'.240 Therefore, it is incumbent on lending institutions to develop other methods of securing loans -group lending is a common example. An alternative which deserves wider consideration is an approach in which a borrower assigns the right to a lender, in the event of default, to take over the former's land for a season or two, and reap the returns from cultivating it, rather than to seize the land. The lender could hire the borrower and his family as wage laborers for that period of time, thus providing them with an income equivalent to the minimum wage for part of the year. Equally, anyone else could be hired for that purpose. Obviously, the limits on loan size would have to be dimensioned with the potential harvest returns in mind, but such a procedure would represent an alternative way to provide a lending institution with the requisite guarantees without the threat of creating more landlessness among the rural poor.

In real estate law, this kind of arrangement for collateral is known as antichresis. It has foundations in Greek and Roman law. It has not always been regarded favorably in history; in an earlier era, the Catholic Church considered it to be usurious and inveighed against it. Originally, it had the legal status of a clause in standard real estate contracts, in which title to the assets was also pledged. In many modern European legal codes, it has been given the character of an independent contract. In the Italian code, it is a contract that conveys only the right of usufruct to the creditor. In the French, Spanish and German codes, it is also considered to implicitly convey the right of foreclosure if it is necessary to recover all of the credit. (Antichresis has not been accepted in any form in Swiss law.) Banks traditionally have been reluctant to enter into such contracts, not wishing to become involved in property administration. Nevertheless, it can be argued that contracting out the administration of a farm for a year or two is less onerous than foreclosure and sale of the property, particularly when there are doubts about whether the judicial and political systems would support foreclosure of small farms in low-income areas.

A form of antichresis has been implemented in Bangladesh, as a way to enable small farmers to provide security for loans:

The most popular form of land mortgage found in the study area is transfer of user rights in land in exchange for cash, with the stipulation that such rights will revert back to the owner once repayment is completed A variant of this system is sometimes encountered in which the land reverts back to owner control automatically at the end of a stipulated period.241

Wider exploration of this mechanism for guaranteeing agricultural loans would appear to be

241. K. A. S. Murshid, 'Informal Credit Markets in Bangladesh Agriculture: Bane or Boon?', in G. H. Peters and B. F. Stanton (Eds), 1992, p. 660.

warranted, in the interest of both facilitating more lending to agriculture and protecting land rights of the poor.

5.9.1.8 Eliminating Subsidies that are Skewed in Favor of the Non-Poor

The ability of low-income rural families to acquire land can be enhanced by redirecting pricing policies and other policies so that they are targeted on the poor, as discussed earlier in Chapter 3. In practice, many agricultural policies and programs, from guaranteed crop prices to interest rate subsidies to agricultural extension, provide disproportionate benefits to the better-off farmers. While these farmers often are a vital part of the sector's productive structure, and should not have to face the macroeconomic distortions that frequently penalize agriculture (Chapter 4), there is no justification for targeting sectoral subsidies disproportionately in their favor. Effective action to redirect the benefits of special sector programs toward the poor would, in itself, improve their access to land through existing mechanisms. This point was made by Binswanger and Elgin,242 as quoted in an article by De Klerk: 'a pre-condition for . . . land reform is the prior elimination of distortions favoring large farmers'. 243

5.9.1.9 Distributing State-Owned Land to Low-Income Ruval Families

In countries where national and/or local governments hold title to significant amounts of agricultural land, one of the most powerful measures for improving the access of the poor to land is to adjudicate that land to the rural landless and to farmers with very small plots. As noted above, this kind of measure was one of the basic ingredients in the successful land reform in Taiwan. The land should be sold, rather than given away, but for the reasons mentioned previously, its price should be subsidized. If the lands are owned by governments, then fiscal outlays would not be required to subsidize the land price. The size of the new plots should be well above subsistence level, but not so large as to reduce the number of beneficiaries significantly. The exact size will depend on agronomic conditions and other variables, but in Africa and Latin America, it normally would range from 5 to 20 hectares. In East Asia, the corresponding plot size would be smaller.

A principal operational difficulty that can arise is that State lands may already be occupied by squatters. In such a case, a policy option would be to require them to pay for the land they are occupying (with a mortgage), up to a specified ceiling of landholding size, and to place the lands above the ceiling amount in a pool for the program of redistribution. If the squatters have been on their land many years and are politically influential, the launching of such programs can face resistance. However, the potential disruption associated with changing their de facto degree of access to land would be considerably less than that attendant upon programs of expropriation of titled private lands, as pointed out above for the case of Honduras, and the government budget would benefit from a policy of requiring squatters to pay for the land that they use.244 Production levels may well rise with such a program, given the well-known tendency of smaller farms to produce more output per hectare of land.

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