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Old Monday, February 22, 2016
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Default The economics of land reform

The economics of land reform

Due to the colonial history of Pakistan, land distribution is highly skewed in favor of political and social elites. According to estimates, four percent of the wealthiest rural landowners own more than fifty percent of all cultivated land in Pakistan. Moreover, fifty percent of the rural families are landless and this number is continuously on the rise.

In order to understand why people are poor, we must start with looking at what kind of work they are doing and how much they are paid. The majority of the rural poor are landless, small peasants who primarily earn their living by working on the land of large landowners.

For large landowners, one of the key economic issues is how to extract work from labourers by offering them as little as possible in return. In order to ensure continuous flow of cheap labour, large landholders adopt a very complex system of labour control. We can list at least three kinds of labour control system.

First, ‘social controls’ – that is, discriminating workers based on caste and other non-economic identities. This is done by imposing cultural and political sanctions on certain castes and groups of people including religious minorities. One of the main purposes of social controls is to keep a check on the upward mobility of agricultural labourers and expand the availability of low-skilled labourers. This way large landowners increase their bargaining position and keepwages as low as possible.

The second kind of labour control is ‘environmental controls’. Rural spaces are kept in isolation through inadequate infrastructure and communication facilities. This is accompanied by low levels of public and private investment in education and healthcare facilities in rural spaces. This does not only lower the living standard of the rural poor but also reduces the linkages between the rural poor across villages and regions. Moreover, it also keeps a check on the job prospects of the rural poor outside their own village. As a result, the bargaining power of large landholders increases and the wages of rural workers remain low.

The third kind of labor control is ‘institutional controls’. Institutions are set up in a way that they create a system of patronage. Laws, regulations and state policies are designed to empower large landowners and make the rural poor dependent on them. This keeps a downward pressure on the wages of agricultural workers.

Together these three forms of social controls reinforce each other and perpetuate poverty among working people in rural spaces.

Progressive economists have long suggested land reforms to help alleviate rural poverty. Land reforms refer to a set of policies in which land is redistributed from large landowners to landless and small peasants. But critics of land reforms have argued that redistribution of wealth distorts market incentives and mechanisms. They also argue that a developing country like Pakistan is under performing on the economic front because markets are not allowed to operate efficiently. In other words, critics of land reform argue that it is not a question of ‘distribution’ but a matter of ‘well-functioning markets’.

Given the ideological dominance of the critics of land reforms (mainstream economists), I am going to use their theoretical constructs to make an argument in favour of agrarian land reforms. Agrarian markets are not operating efficiently because of unequal distribution of land and in order for agrarian markets to operate efficiently, land reforms are essential.

One of the most central themes of mainstream economic theory is ‘efficiency’. According to the rationale of efficiency, each factor of production should be sold at its correct price. In other words, people should not be charged different prices for the same good. The second key assumption of mainstream economic theory is that people respond to prices (incentives). That is, if the price of a good goes up then people demand less of that good and vice versa.

Now let’s look at the agrarian markets in Pakistan. Factor markets in the rural economy of Pakistan are fragmented. In simple words, the price you pay for a factor of production (labor, land and capital) depends on your socio-economic class. For example, a large landholder pays a lower price for capital vis-à-vis landless or small landholders. Credit is available to large landowners at much cheaper rates vis-à-vis a small landholders.

Similarly, land markets in rural spaces are highly fragmented and localised. Large landowners are highly unlikely to sell their land even if it is sitting idle. Land gives monopsony power to large landowners and in order to maintain their monopsony power, large landowners are not using land efficiently. (Monopsony refers to a situation in which there is only one employer and tons of people looking for employment). In most villages of Pakistan, the only possible job a landless or small landholder can find is cultivating the land of large landowner. Aware of this fact, large landowners hire them at much lower wages than the ‘true’ market wage.

On the other hand, small landholders are land-scarce. According to a simple supply and demand principle, if a resource is scarce, its price is higher. Thus the implicit rental rate of land for small landholders is much higher vis-à-vis large landowners who are land-abundant.

Landless workers and small landholders on average pay a much higher price for credit (capital) as compared to large landholders. Therefore, it is obvious that small and large landholders are going to behave in opposite ways (remember: people respond to incentives). That is why we observe that large landholders use higher capital-to-labour ratio in agricultural production as compared to small landholders. Similarly, large landholders are going to use higher land-to-labor ratio as well.

Small landholders are going to use lower capital-to-labour ratio and lower land-to-labour ratio. In other words, small landholders use more labor intensive techniques of production. Therefore, if we have land reforms which lead to an economy full of small landholdings, more employment will be generated. Similarly, small landholdings use a higher proportion of labour per acre of land as compared to large landholdings. Thus we can expect a much higher yield per acre in the post-land reform economy.

Multiple empirical studies consistently show an inverse relationship between farm size and output per acre. That is, on average small landholdings yield more output as compared to large landholdings. Thus land reforms would boost agricultural output in Pakistan.

One can argue over how using more labour intensive techniques of production is more efficient for the overall agrarian economy as compared to capital intensive methods. The answer is that it depends on the resource endowment of a country. Given that Pakistan is a capital-scarce, land-scarce and labour-abundant economy, it makes total economic sense to use labour intensive methods of production. This will not only create more employment but will also enhance overall efficiency in the agrarian economy.

It is very clear that agrarian markets in Pakistan can’t operate efficiently and rural poverty cannot be eliminated as long as systems of labour control and monopsony power remain in the hand of large landowners. Thus land reforms is an appropriate economic response to end rural poverty.

Published in The News 23rd February 2016.
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