FOO Law and Economics

Wednesday, January 28, 2009

The economics of land reform and the wisdom of King Solomon

Land reform has been difficult in large part because land owners and tenant farmers have been in conflict. Owners will give up the land but only at a high price. Tenants, on the other hand, want the land for free along with agricultural support services. The tax payer is caught in between because reform requires public funds. Does reform have to be so difficult and expensive?

One solution comes from the Bible. Consider the land in the same light as the baby claimed by two “mothers” who asked King Solomon to intervene. Solomon had to know who the real mother was. He ordered the baby cut in half, and the one who objected got back her baby. It turns out that Solomon’s approach can be recycled, if we view the problem as one of ending a co-ownership between the land owner (O) and his tenant farmer (F), while also improving economic performance. The land reform puzzle is one of learning which of the two would make the land more productive. The experts are divided. One school of thought believes that O neglected the productivity of the land (he had too much land anyway). A second school claims that F would acquire the needed skills when he becomes an owner. Yet another view considers that O has the expertise, but that he should not simply evict F.

Borrowing some wisdom from King Solomon, I suggest the following arrangement. First, give O and F equal undivided shares in the land. Second, let them bargain so that the land would end up in the hands of the more productive party. How should such bargaining be conducted? It may be set up so that either party could set a price on the land, while the other has two options at that price: he can buy the share that is not his, or he can sell out to the first party. The land is thereafter “set free,” salable to others without further restrictions.

The bargain has the desirable feature of making the correct price of the land discoverable. If O sets too high a price, he has to pay that to F. If F sets too low a price, O can buy him out. In his self-interest, whoever sets the price will choose one that correctly values the land. O and F should know this value, just as the two women knew, in their hearts, who was the real mother.

What are the flaws of this bargain? One is that F might not be able to buy out O. But this can be surmounted since the government would lend him money for the purchase. The government gets a good deal, as the loan covers only half the land, instead of the whole. F could also borrow from any source since he can re-sell the “freed” land later on.

This leads to the objection that the bargain unduly favors F, who gets a half-share for free. It looks like a taking without just compensation. But there is just compensation, particularly if the land had been with O and F for generations. An enlightened land owner should also see the bargain as intrinsically fair because he can now keep the entire land if he wishes.

One lesson from other countries is that reform should be a one-time event. If nothing is done to resurrect the expired land reform law, this could benefit the economy, as the land market would no longer be “frozen.”

Why does our farm productivity lag behind that in other countries like Thailand, Vietnam, or Japan? The answer lies in the perverse incentives in our land market. Land owners traditionally viewed land as status and power symbols, and not just a factor of production. Farmers would not take the effort to increase productivity if they had to share the gains with someone else. A Solomonic bargain would promote social justice while also making the agricultural sector a driving force for economic growth.

(This essay is based on a research paper I presented at a graduate class in law and economics at George Mason University in 2003. Not much has changed since then other than the expiration of the land transfer component of the land reform program in the Philippines.)

See the abstract and conclusions of the research paper.

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Having long toiled within a behemoth, I have since decamped to a quiet bay, at times on a single outrigger. I contemplate how social order and the economy interact. And what it's all about.

I've come to realize, painfully, that opportunity cost shatters the lenses of artificial privilege and self-delusion -- either you can or can't, whatever be the object. Why? Because opportunity cost is the next best thing.

Contemplation works.

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