Agricultural Misallocation, Occupational Choice and Aggregate Productivity - The Role of Insecure Land Rights and Missing Financial Markets

Lead Research Organisation: University of Edinburgh
Department Name: Sch of Economics

Abstract

Compared to advanced economies, most of the least developed countries feature extremely low agricultural labour productivity while productivity in non-agriculture is only modestly low. This particular inefficiency in agriculture is a puzzle. We believe that it can partly be explained by misallocation of production factors, in particular of land, across farms - e.g. some farms use too much land and others too little. Besides, comparing incomes of workers in agriculture and non-agriculture, it is puzzling why so many workers remain in agriculture, indicating misallocation across occupations.

The aim of our project is twofold. First, we plan to identify causes of the aforementioned misallocation. Second, we intend to compute how policies that diminish misallocation could change agricultural, non-agricultural and, ultimately, aggregate productivity - i.e. by how much could they potentially increase GDP. Also, we are interested in the welfare effects of such policies on individuals with distinct characteristics (by skill, wealth, gender, age, occupation, etc.) - who stands to gain and who may lose? As such our proposal directly addresses Theme 1 of the present Call and indirectly addresses Theme 2 as well.

We hypothesise two reasons for misallocation. The first one is insecurity of land rights. In many countries in sub-Saharan Africa, farmland formally belongs to the public while individual farmers are granted the right to farm it. Some farmers may lack the skills to use the granted land efficiently, but short of the right to sell or rent it out, they operate it. Meanwhile, skilled farmers are precluded from operating an efficient amount of land, either because they cannot get hold of communal land or because the remaining privately held land is expensive. This also affects the occupational choice of individuals. Inefficient farmers may remain in farming because it grants them free land usage while optimally they would prefer to sell that right and work in other sectors.

Second, misallocation of land results from missing financial markets. Many farmers have no access to insurance against risks and also lack saving mechanisms such as a bank account. In such circumstances farmers may hold land not only for production purposes but also as an asset to be sold in the advent of adverse shocks. Farmers particularly keen on insurance may operate more land than what is efficient, draining resources from farmers who are relatively efficient but unwilling to pay an insurance premium for the land use. Still others may be efficient enough to increase landholdings, but are held back by credits constraints.

We intend to measure the validity of our hypotheses by studying the specific cases of Ethiopia and Uganda, two countries characterised by a high fraction of land subject to insecure tenure and underdeveloped financial markets. For this we will collect the necessary data via a social survey. The choice of these two countries will help us distinguish between issues that are country-specific and those that can be extended to more regions in Sub-Saharan Africa and other developing countries sharing similar institutional and market features. Specifically, we plan to run surveys of individuals to estimate their decisions in the face of existing policies, prices and market arrangements.

We will use structural general equilibrium model economies for our analysis. In such models decisions of distinct individuals and the formation of prices are all interdependent. This is crucial, because our proposed policy changes may alter the decisions of many individuals, which in turn affects relative prices and creates even more economic shifts. Our approach takes into account such feedback effects and is hence an ideal tool to understand what would happen if policies were to change.

Planned Impact

The beneficiaries of our research are primarily those interested in policies aimed at alleviating poverty in predominantly agricultural economies.

1. Policymakers: Our research will be of immediate interest to government officials and policy analysts in Ethiopia and Uganda, but also in other countries where land rights are insecure and/or farmers have limited access to financial services. Our research provides answers to two types of questions.

(a) How large is the income loss due to existing policies/institutions governing property rights and financial markets? Our quantification will distinguish between the impacts on agricultural as opposed to non-agricultural productivity. Our quantitative exercise will also allow to measure how much of the income loss stems from misallocation of land across farms, and how much is due to misallocation of workers across different sectors in the economy. These insights will diagnose to what extent such policies/institutions represent obstacles to development.

(b) What is the potential effect of counteracting policies? For instance, we will look into policies such as land certfication, permission of land sales and rentals, and crop insurance. Our aim is also to compute welfare effects of such policies on individuals with distinct characteristics (e.g. by skill, wealth, land ownership, gender, age and occupation). This enables policymakers to identify the likely beneficiaries from policy changes. It also permits the formulation of appropriate transfers to compensate potential losers. Crucially, we will weigh the fiscal costs of such policies against potential GDP gains to identify fiscally sustainable measures. In addition, we will provide two practical pieces of information: first, how will policy changes affect relative prices (of various goods, land and labour), and, second, how are these policy changes to play out over time.

2. Advocacy groups: Our findings are also aimed at advocacy groups on a number of themes.

(a) Nutrition: Raising agricultural productivity ultimately increases the production of food and stimulates a drop in food prices. We will not explicitly look at welfare effects beyond higher food consumption, but our results should be of interest to those arguing that better nutrition produces knock-on benefits in the form of improved health and enhanced cognitive and physical abilities.

(b) Rural land security: Our research should be of concern to groups advocating a more transparent and secure allocation of land rights. Our project will provide them with additional arguments based on efficiency that go beyond pure equity considerations. This is of special interest to groups advocating gender equality as women's land security is often particularly compromised.

(c) Rural development: Our estimation of the optimal matching technology between individual farmers and the quantity and quality of land operation will also be of immediate interest to aid agencies, educational campaigners and other organisations promoting efficient and sustainable farming.

3. Public-private partnerships: Our findings will deliver quantifications that will prove valuable for public-private partnerships seeking investment opportunities. They need to know how social returns compare to private returns. Such projects include e.g. the following:

(a) Micro-credit: To the extent that we find major welfare losses stemming from missing financial markets, the social returns to micro-credit may show up as significantly higher than private returns once aggregate economy effects are taken into account.

(b) Land banking: In the absence of secure land rights that obstruct allocation of land across users, one interesting innovation consists of developing land banks that pool land rights by renting in from owners and in turn rent out land to other users.

(c) Rainfall insurance: This may be an important product to sponsor if the lack of weather insurance entails large social costs.

Publications

10 25 50
 
Description Our foremost research question is how obstacles to land transferability in Sub-Saharan Africa impact agricultural and aggregate productivity. In particular, we ask: how would productivity and occupational choice (between farming and non-farming) adjust if land became freely transferable.

We find that introducing full transferability of land would substantially increase agricultural labor productivity while decreasing that of non-agricultural sectors. In particular, the ratio of agricultural to non-agricultural productivity is predicted to rise by as much as 40%. This explains a large portion of the puzzlingly high agricultural productivity gap present in developing countries. We find that full land transferability would also induce a large occupational shift of roughly 13 percentage points of workers away from the farming sector. Interestingly, we find that the simultaneous increase in GDP of 6 percent is not as sizeable.

Our quantitative findings are based on a model that features two innovations. The first one is selection. We compute that obstacles to land transferability induce disproportionately many unskilled individuals to work in agriculture. Many of the individuals with a comparative advantage in non-agriculture stay in agriculture where they can make productive use of their land. Land liberalization, then, motivates a lot of workers to switch from agriculture to non-agriculture. They follow their comparative advantage while still enjoying revenue from renting or selling their land. This effect accounts for much of the relative sectoral productivity shift. The second innovation is our use of the general equilibrium and full price adjustments. This channel turns out to be key. Adjustments in food and land rental prices act as a safety valve. They make the agricultural sector relatively more lucrative and hence prevent an even larger occupational move in the aftermath of land liberalization.

Our finding is important because it can address why many farmers as well many development economists believe that securing land titles is highly beneficial (since they typically do not incorporate long-term price changes), while also underscoring that the expected aggregate benefits from a hypothetical policy change are potentially not so large. Our finding may also alleviate the concern of many governments and policy advisers who fear that the implementation of fully transferable land rights would lead to massive outmigration from rural to urban areas.

Our conclusion from this exercise is that obstacles to land transferability as observed in Sub-Saharan Africa do create distortions and can to a large extent rationalize the large agricultural producticty gap. Their ultimate impact agricultural employment and especially aggregate GDP, however, is not as pronounced.
Exploitation Route We believe that our findings are interesting to policymakers in Sub-Saharan Africa who are exploring the impact of land liberalisation. We have made previous contacts with this audience group in Ethiopia and Uganda and we will increase our endeavors in the future as our findings become more precise.
Sectors Agriculture, Food and Drink

URL https://agriprodmacro.wordpress.com/
 
Title Pilot survey of agricultural production, production risk, and land tenure security in Ethiopia 
Description This is a small survey on farmers in Ethiopia, conducted in December 2014. It measures the perception of land tenure security and production risk, and how they relate to actual agricultural output. The pilot sample is small, but it is quite representative of Ethiopia's regions. The survey is a pilot in preparation of a larger data collection exercise. 
Type Of Material Database/Collection of data 
Year Produced 2016 
Provided To Others? Yes  
Impact For now the pilot was only used to inform our research papers. 
URL https://agriprodmacro.wordpress.com/
 
Title Pilot survey of agricultural production, production risk, and land tenure security in Uganda 
Description This is a small survey on farmers in Uganda, conducted in January 2015. It measures the perception of land tenure security and production risk, and how they relate to actual agricultural output. The pilot sample is small, but it is quite representative of Uganda's regions. The survey is a pilot in preparation of a larger data collection exercise. 
Type Of Material Database/Collection of data 
Year Produced 2016 
Provided To Others? Yes  
Impact For now the pilot was only used to inform our research papers. 
URL https://agriprodmacro.wordpress.com/
 
Title Survey of traditional and political village chiefs in Uganda: Institutions, land tenure, and water provision 
Description The database is a survey of 300 village chiefs in Uganda, equally split between traditional (chiefs, clan leaders and elders) and political authorities. The respondents were randomly selected based on a stratfication that is representative of the largest 12 ethnic groups, i.e. about 85% of the Ugandan population. The data is GPS coded and can be linked to larger socio-economic datasets such as the LSMS-ISA. It contains information on the relative power of formal political versus informal traditional authority regarding the resolution of social and economic conflicts. It also contains information on practices and attitudes regarding land tenure (property rights, transactions, and prices) as well as water provision (initiatives for irrigation and drinking water). The data is useful for studying the impact of institutional arrangements on social and economic outcomes. 
Type Of Material Database/Collection of data 
Provided To Others? No  
Impact No impact yet. We are currently preparing two policy briefs for Ugandan think tank EPRC (one on land tenure and one on irrigation) regarding the findings. This is in collaboration with Francis Mwesigye. 
URL https://agriprodmacro.wordpress.com/category/data/
 
Description Pilot survey data collection Ethiopia 
Organisation Association of Ethiopian Microfinance Institutions
Country Ethiopia 
Sector Charity/Non Profit 
PI Contribution The purpose of our collaboration with the Association of Ethiopian Microfinance Institutions was to implement a pilot survey on farmers in Ethiopia (please see the relevant database). Our input was the design of the questionnaire as well as the guidance of enumerator in the field.
Collaborator Contribution The Association of Ethiopian Microfinance Institutions helped us to re-formulate our questionnaire, gave suggestions on how to implement the survey, and issued a letter of support that allowed us to meet farmers. They also made available suitable enumerators.
Impact Pilot survey data on farmers in Ethiopia as described in the data section. We are also planning to collaborate in the design and implementation of the larger data collection exercise.
Start Year 2014
 
Description Pilot survey data collection Uganda 
Organisation Economic Policy Research Centre (EPRC)
Country Uganda 
Sector Academic/University 
PI Contribution The purpose of our collaboration with the Economic Policy Research Centre was to implement a pilot survey on farmers in Uganda (please see the relevant database). Our input was the design of the questionnaire as well as the guidance of enumerator in the field.
Collaborator Contribution The Economic Policy Research Centre helped us to re-formulate our questionnaire, gave suggestions on how to implement the survey, and issued a letter of support that allowed us to meet farmers. They also made available suitable enumerators.
Impact Pilot survey data on farmers in Uganda as described in the data section. We are also planning to collaborate in the design and implementation of the larger data collection exercise.
Start Year 2015
 
Description Communal Land and Agricultural Productivity - Presentation at Annual World Bank Conference on Land and Poverty 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Policymakers/politicians
Results and Impact This conference is an important outlet for impact both on the research as well as the policymaking community.
Year(s) Of Engagement Activity 2015
URL http://www.oicrf.org/document.asp?ID=15417
 
Description Communal Land and Agricultural Productivity - Presentation at Atlanta Federal Reserve Bank 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic but also policymaking community.

See paper "Communal Land and Agricultural Productivity"
Year(s) Of Engagement Activity 2015
URL https://www.frbatlanta.org/research/seminars.aspx
 
Description Communal Land and Agricultural Productivity - Presentation at Brock University 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic community.

see paper
Year(s) Of Engagement Activity 2015
URL http://www.brocku.ca/social-sciences/departments-and-centres/economics/events/guest-speakers
 
Description Communal Land and Agricultural Productivity - Presentation at CEPR conference Macroeconomics and Development, LSE, London 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Conference seminar meant to increase interest in agricultural productivity and land allocation amongst macroeconomists.

see paper
Year(s) Of Engagement Activity 2015
 
Description Communal Land and Agricultural Productivity - Presentation at Economic Policy Research Centre, Kampala 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar with some of the leading economists and policy advisers in Uganda. The talk led to many different exchanges. In particular, we learned much about the institutional arrangements in Uganda while our hosts obtained new insights into the methodology of studying the impact of land allocation in an economy-wide context. In particular, it also led to the exploration of research collaboration with Francis Mwesigye, a research fellow at EPRC Kampala.

see paper
Year(s) Of Engagement Activity 2015
 
Description Communal Land and Agricultural Productivity - Presentation at Ethiopian Development Research Institute, Addis Ababa, Ethiopia 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar with some of the leading economists and policy advisers in Ethiopia. The talk led to many different exchanges. In particular, we learned much about the institutional arrangements in Ethiopia while our hosts obtained new insights into the methodology of studying the impact of land allocation in an economy-wide context.

See paper.
Year(s) Of Engagement Activity 2014
 
Description Communal Land and Agricultural Productivity - Presentation at Ethiopian Economic Association meeting, Addis Ababa. 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Conference seminar with some of the leading economists and policy advisers in Ethiopia. The talk led to many different exchanges. In particular, the audience was interested in the methodology of the research, i.e. how land allocation produces effects that trickle through the aggregate economy. We also interacted with a number of policy advisers.
Year(s) Of Engagement Activity 2015
URL http://www.eeaecon.org/node/8375
 
Description Communal Land and Agricultural Productivity - Presentation at Exeter University 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic community.
Year(s) Of Engagement Activity 2016
URL https://business-school.exeter.ac.uk/events/seminars/individualseminar/?id=1131
 
Description Communal Land and Agricultural Productivity - Presentation at McGill University 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic community.
Year(s) Of Engagement Activity 2016
URL https://www.mcgill.ca/economics/seminars/2015-2016
 
Description Communal Land and Agricultural Productivity - Presentation at McMaster University 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic community.

see paper.
Year(s) Of Engagement Activity 2015
URL https://www.economics.mcmaster.ca/seminars/previous-seminars
 
Description Communal Land and Agricultural Productivity - Presentation at Royal Holloway University, London 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic community. We are investigating research collaborations with one of the participants, Juan Pablo Rud, an expert development economist.

see paper.
Year(s) Of Engagement Activity 2015
URL https://www.royalholloway.ac.uk/economics/events/seminars/appliedtheoryseminarseries/appliedtheoryse...
 
Description Communal Land and Agricultural Productivity - Presentation at Society for Economic Dynamics, Warsaw 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Conference seminar meant to increase interest in agricultural productivity and land allocation within the academic community. The SED conference is one of the major pathways to academic impact in the field of macroeconomics.

see paper
Year(s) Of Engagement Activity 2015
URL https://editorialexpress.com/conference/SED2015/program/SED2015.html
 
Description Communal Land and Agricultural Productivity - Presentation at Trinity College Dublin 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic community.
Year(s) Of Engagement Activity 2017
URL https://www.tcd.ie/triss/events/2017-01-31-Econ/
 
Description Communal Land and Agricultural Productivity - Presentation at Universitat Barcelona 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic community.

see paper
Year(s) Of Engagement Activity 2015
URL http://www.ub.edu/ubeconomics/events/communal-land-and-agricultural-productivity/
 
Description Communal Land and Agricultural Productivity - Presentation at York University 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar meant to increase interest in agricultural productivity and land allocation within the academic community. We are investigating research collaborations with one of the participants, Tasso Adamopoulos, a leading researcher in the field of macro development.

see paper
Year(s) Of Engagement Activity 2015
URL http://dept.econ.yorku.ca/seminars/seminars_fall14.html
 
Description International Workshop co-organized with International Growth Centre - Addis Ababa 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact This 6-day event was led by the International Growth Centre (Doug Gollin and Alemayehu Seyoum Taffesse) and co-sponsored with funds from our award. It was meant to bridge the gap between some of the leading academic researchers in macro development and Ethiopian academic practioners as well as policymakers.

It included the organisation of 3-day field trips to have international researchers gain acquantaince with the daily workings of the Ethiopian economy and to spark ideas and debate on future research. The allowed researchers to conduct interviews and focus group discussion questions on topics of their interest.

Second, we helped organise meetings between international and local researchers to foster engagement between expertise in frontier research and academic expertise in the local Ethiopian context.

Finally, we also helped organise two consulting meetings attended by the international researchers. One with the director of the Central Statistical Agency of Ethiopia, Biratu Yigezu, and one with the director of Ethiopia's foremost economic policy research centre EDRI (as well as main economic policy advisor to the Ethiopian government), Neway Gebre-ab. This was informative both for the officials (learning about data requests and research concerns) as well as for the researchers (learning about the availability of data and the underlying concerns of policymakers, and about current and planned reforms).



- We have started engaging on a research project with Markus Poschke from McGill University.
- Had a special meeting followed by Q&A with the economic advisor to the prime minister.
Year(s) Of Engagement Activity 2015
 
Description Organization of workshop: Agricultural Productivity, Rural- Urban Migration, and Structural Transformation 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact We organized a two-day workshop with 11 invited speakers, and an additional 25 workshop delegates. The aim of the workshop was to bring together some of the leading researchers in the fields of micro and macro development. In particular, the event was meant to foster cooperation and dialogue between two different strands of the development literature.
Year(s) Of Engagement Activity 2017
URL https://agriprodmacro.wordpress.com/category/workshops/
 
Description Presentation at AERD-DEGRP conference "Economic Opportunities for a Better Future Leveraging Agriculture, Innovation and Financial Inclusion" 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact This two-day conference brought together policymakers, academics and industry leaders to discuss research findings on agricultural productivity in Africa. It turned around the notion of connecting researchers and policymakers in order to foster the implementation of promising policies. The event also received media coverage. Our contribution consisted of presenting our findings and how they fit into the broader debate on agricultural productivity and structural transformation.
Year(s) Of Engagement Activity 2016
URL http://event-reg.newmark.co.ke/
 
Description Presentation at Dynamics, Economic Growth and International Trade DEGIT XXI Conference 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Conference with panel on the role of agriculture in fostering economic growth.
Year(s) Of Engagement Activity 2016
URL https://www.nottingham.ac.uk/gep/news-events/conferences/2015-16/degit21.aspx
 
Description Presentation of Communal Land and Agricultural Productivity at Macro Workshop in Sils Maria 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Participation in workshop on macroeconomics.
Year(s) Of Engagement Activity 2017
URL https://dl.dropboxusercontent.com/u/3285496/SilsMaria_Workshop_2017.pdf
 
Description Presentation of Irrigation and Agricultural Productivity at Macro Workshop in Sils Maria 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Participation in workshop on macroeconomics.
Year(s) Of Engagement Activity 2018
URL https://www.dropbox.com/s/qkc8ukis71w41am/swiss_macro%20_workshop_2018.pdf?dl=0
 
Description Presentation of Irrigation and Agricultural Productivity at UCL 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Research seminar.
Year(s) Of Engagement Activity 2018
URL http://events.ucl.ac.uk/event/%7Bhttp://www.columbasystems.com/customers/ucl/gpp/eventid/%7Ds4n-jdcz...