What is the impact of introducing a market in the use of land in developing countries?
Martin Ravallion and Dominique van de Walle’s study of Vietnam’s recent experiences
with extensive market-based agrarian reforms – published in the October 2006 Economic
Journal – finds that while the adjustment was not rapid and some types of household
benefited more quickly than others, the transition process did favour the ‘land-poor’ and led
to a more efficient allocation of land.
No economist can fail to be struck by the size and potential welfare significance of the
reforms that are required to transform a control economy into a market economy. The
essential policy reforms bring both opportunities and risks to the living standards of a
country’s citizens.
In poor economies, the initial focus of reform efforts is naturally the rural sector, which holds
the bulk of the population and almost all the poor. Economic development will typically
entail that many rural households move out of farming into more remunerative (urban and
rural) non-farm activities. Reforms that shift the rural economy from relatively rigid
administrative allocations of farmland to more flexible market-based allocations can thus
play an important role in the process of economic growth.
Vietnam has probably gone further than any other developing economy in implementing
such market-based agrarian reforms. These reforms followed closely the two steps of the
standard policy prescription for transforming a socialist command economy into a market
economy: first, privatising productive assets; and then, undertaking legal reforms to permit
free transactions in those assets.
The first step entailed breaking up the collectives (whereby land had been farmed by
organised brigades) and assigning the land to individual households by administrative
means. The second stage introduced land titles and allowed the use rights over land to be
legally transferred and exchanged, mortgaged and inherited.
Ravallion and van der Walle’s study assesses whether Vietnam’s efforts to introduce a free
market in land-use rights have helped to foster a more efficient allocation of land, and
hence helped to reduce poverty. The researchers find evidence that — after the legal
reforms to introduce a market in land-use rights — land was re-allocated in a way that
attenuated the initial inefficiencies of the administrative assignment of land at the time of
de-collectivisation.
Households who started with an inefficiently low (high) amount of crop land under the
administrative assignment tended to increase (decrease) their holdings over time. But the
adjustment was not rapid; in the aggregate, only a third of the initial proportionate gap
between the actual allocation and the efficient allocation was eliminated within five years.
The market mechanism worked more rapidly for some types of households than others. At
a given land deficit or surplus relative to the efficient allocation, households who started
with the least crop land under the administrative assignment tended to see the largest
increase in holdings during the transition. In other words, the transition process favoured
the ‘land-poor’.
The speed of market adjustment was also affected by location and demographic shocks,
and the new market-driven process favoured households with long-term roots in the
community, with male heads, better education and with more non-allocated land. The
authors find that these factors were generally cooperant with competitive forces, in that they
were jointly positively correlated with land reallocation and the initial land deficits relative to
the efficient allocation.
These results are not consistent with the view that strong non-competitive forces in the
local political economy worked against efficient land reallocation. But the findings suggest
that the speed of land market adjustment can be slow, possibly reflecting other market
imperfections, such as for credit.
ENDS
Notes for editors: ‘Land Reallocation in an Agrarian Transition’ by Martin Ravallion and
Dominique van de Walle is published in the October 2006 issue of the Economic Journal.
The authors are at the World Bank.
For further information: contact Martin Ravallion on +1-202-473-6859 (email:
Mravallion@worldbank.org); or Romesh Vaitilingam on 07768-661095 (email:
romesh@compuserve.com).