On Ownership and Tenancy

After World War II, the overwhelming opinion was that the personal interest the private owners had in production and profit would suffice to ‘turn sand into gold.’ An exception were the socialistic countries where the prevailing opinion was that private ownership of the scarce production factor land leads to exploitation and should be abolished. There are enough examples to prove both arguments empirically. Alternatives do certainly exist, such as the communal control of land in Africa and the Mexican ejido with hereditary rights of use, but they are too unique to exercise much influence on the debate.

Unfortunately the ‘sand into gold’ argument, which has more than one grain of truth in it, has become an ideology. In the debate, the fact was often forgotten that the positive results cannot be taken for granted, but rather that they depend on the existence of certain prerequisites. If these do not exist, it is unlikely that positive effects ensuing from private ownership of land will take place, and unfortunately these prerequisites do not exist in many regions.

The prerequisites of positive effects of private ownership of land are:

1. Sufficient size of land. If the land available to a cultivator for cropping becomes too small, as is the case in many developing countries due to partitioning of land as a result of inheritance, indebtedness and poverty are the consequence.
2. A certain attitude towards work, saving and investment is necessary, i.e., qualities we usually admire in family farmers.
3. Institutional support by the public sector in those areas in which the individual cannot help himself such as cooperatives or similar institutions for providing credit, supplying inputs, marketing and advisory services.
4. Freedom for the peasant to make the decisions on farm management, who at the same time carries the burden of all of the risks.

The major alternative, state or socialistic ownership of land, has proved to have sever limitations. Production suffered in particular, partially because state planning and intervention in the details of land management caused many mistakes. This was mainly due to what Otto Schiller had already called ‘human failure’ around 1950. The system gave little incentive to the work force because extra efforts caused any increase in benefits for the individual. An example were the ‘household plots’ on which the individual families were able to cultivate vegetables, fruit and small animals for their own consumption as well as for selling privately. In this case, labour input and production were much higher than on the large estates.

This situation was important for the recent changes in socialistic countries. The transformation is not yet finished. It has resulted in some openings for the market and its incentives – although incomplete. Several countries hesitate to introduce private property in land again. The process is still being debated and is made difficult by the fact that collective workers have had no experience in independent farming for three generations and have no buildings, machines or other capital. Furthermore, no supporting institutions exist for small farmers, and – last but not least – dismantling the collective estates would erode the basis of social security for all of the people belonging to them who in the past drew their pensions from the estates.

The experience of the last 50 years has led to a more differentiated point of view on the issue of private land ownership. Property, including property in land, is a basic element of the economic order. Its clear definition, which is uniform for all of man, is a basic requirement and usually regulated in the constitution. It is necessary to differentiate between property as such – which may be held by various institutions (state, collectives) – and private property in land. The latter is one possibility that has developed historically and culture specifically. It gives the owner security, provides a planning horizon, provides incentives and, thus, makes investments possible as long as the prerequisites mentioned above exist. In many countries, private property in land has led to long-lasting and remarkable progress in the development of agriculture. In a number of cases, some of the private landowners became too successful and exploited others, a development which resulted in dependency and poverty on the part of the masses.

In many countries, private property in land is an important basis for farmers to receive credit. Land as collateral for easy credit for landowners is listed as an important argument in favour of private property and privatization.

However, this argument is frequently overemphasized. While mortgages are an easy and successful instrument for assuring credit for middle and large size farms, it has severe limitations in the case of smallholders. Loans granted on the basis of what you have and not according to the needs for making a specific investment are detrimental to a good credit policy. The fact is more important that mortgages – the instrument for guaranteeing institutional credit – are hardly granted in the case of small farmers. Banks do not usually deal with small farms, and – with variations between the countries – probably three-quarters of all of the cases of loans or credit are granted by informal lenders, even more so in the case of smallholders.

These informal lenders are relatives, neighbours, merchants, traders and other personal acquaintances of the borrower, and they do not usually request a formal mortgage to cover the limited amount of money borrowed to pay for final inputs such as fertilizer of chemicals (crop loans), or for the consumption needs during the last weeks before the new harvest is brought in. One’s ‘reputation’ and ‘social sanctions’ are used as alternative forms of collateral in agrarian societies with close social relations. A person who defaults on a loan risks becoming an ‘outcast.’

Even in the case of banks, mortgages are more of a threat than reality. Banks frequently have difficulty selling land in remote villages because of the solidarity among the villagers. Cooperatives likewise hesitate to take land away from members because of the negative effect on the ‘cooperative spirit.’ More recent developments in the field of credit such as the Grameen Bank and similar institutions also do not rely on mortgages.

While mortgages are definitely an established instrument for granting credit to medium and large size market-integrated farms, it does not suffice as a sole argument for the private ownership of land. This has its place in societies which have a tradition of private property in land (which in most cases is only 200 to 300 years old). One should be careful transferring it to countries with another historical background.

Changes in land-use rights are related to the question of ownership of land. In many countries, land-use rights played a significant role in the history of the countries, but under the influence of the Europeans, they became limited to the various forms of tenancy.

The period following World War II saw a trend to prohibit tenancy. This was considered the correct answer to the lasting difficulties in regulating tenancy in a way that would do justice to both partners. It was not only the unequal position of the partners on the leasing market which made it easy to circumvent regulations. The regulation of tenancy requires annual control, while the abolition of tenancy is a one-time process.

However, enforcing the laws abolishing tenancy proved impossible because the institution of tenancy had already been rooted in the society for generations. Furthermore, tenancy was necessary as an instrument to easily adjust the requirements of the landowners with respect to labour capacity, which could change over time and in the case of unforeseen personal calamities. Therefore, the laws were never strictly enforced. Sometimes management contracts which provided for payment in the form of a share of the harvest – an arrangement that has existed for centuries – presented a completely legal opportunity to circumvent the laws.

A serious impact on tenancy took place around 1970 in the ‘green revolution’ regions. Many landlords dismissed their tenants and used the ensuing potential to make money by means of the new technologies by cultivating the land themselves in the form of centralized farms. Many others transformed the traditional share-tenancy into cash-tenancy, a change which brought some improvement in the relation between both partners. This change in the characteristics of tenancy was further influenced by a widespread change in the characteristics of lessors. Today it is often not the large landowner who rents out land – he has frequently begun to cultivate the land himself – but rather increasingly the smallholder who wants to give up farming, especially with the change of generations. As non-agricultural jobs are insecure in the beginning, the family often keeps the land in order to be able to return to farming if the choice of a new job should prove to be a failure. In the meantime, the land is partly cultivated in the form of part-time farming, while other parts are rented out in order to reduce the workload. As a result, the lessor is in reality frequently not a large landowner, but rather a neighbour, a relative, or a person of a similar status. This has certainly not eliminated all of the problems in the lessor-tenant relation, but it is definitely an important step in the type of tenant-lessor relations.

All of these developments increased the need for the institution of tenancy to allow easy adjustment of land and labour. In more recent times, the abolition policy has hardly been enforced. Instead the trend has been to advocate a new form of tenancy under a different name such as the ‘entrustment of land’ in Taiwan. This development will and must spread. With progressing economic development, more and more people will change their occupation and lose interest in farming, especially with the change of generations. This requires a functioning land market in order to facilitate a smooth transfer of land to people who are interested in cultivation. As the sale of land is unlikely due to the high land prices and the desire to retain land as security is prevalent, forms of leasing land are necessary.

Changes also occurred with respect to the type of lessee. Many ‘progressive farmers’ and ‘economic holdings’ increase their acreage today by renting land in order to economize the use of machinery and enlarge the scope of their activities. Entrepreneurs partly invest in agricultural production based on rented land. (2)

For a long time, sharecropping was regarded as being inefficient, following Alfred Marshall’s argumentation. More recent studies come to the conclusion that sharecropping can be regarded as a compromise between work incentives (when seen alone, fixed rent would be better) and the sharing of risks for risk-adverse peasants. The costs of supervision also appear to be lower.

The most recent impact on tenancy originated in Vietnam and a few other transformation countries which maintained the ownership of land in the hand of the state. At first, land was leased to cultivators for a period of 6 years, but later the rights of use were granted for 20 or 50 years, with an option for renewal. They were also made inheritable and transferable. This arrangement provided a level of security and a horizon for planning and investment similar to the case of private ownership of land. It proved to be a strong incentive, respecting tradition. These long-term transferable leases were even accepted as collateral for loans. This system, which resembles the historical tradition in many countries, is still rather new, but it should be observed careful for it might prove to be a model for other countries. (3)

next: 5. Increasing Socio-economic Differentiation in Agriculture

(2) Details based on empirical studies are given by Bhaumik, Sankar Kumar, Tenancy Relations and Agrarian Development: A Study of West Bengal, New Delhi 1993. Also see Birthal, Pratap Singh and Singh R.P., “Land Lease Market, Resource Adjustment and Agricltultural Development” in: Indian Journal of Agricultural Economics 46, 1991, No. 3.
(3) Cf. Haque, T., Technical Report on Tenurial Reforms and Sustainable Agricultural Development in Viet Nam, FAO, Rome 1994; Agricultural Policy Analysis for Transition to a Market-oriented Economy in Vietnam, FAO Economic and Social Development Paper No. 123, Rome 1994; as well as Weismann, Joshua, “Long-term Leases as an Alternative to Ownership” in: Kolbert, Colin (Ed.), The Idea of Property in History and Modern Times, London 1997.