Tuesday, January 30, 2007

Land reform - institutional economics

Neoclassical theory may be seen as a highly idealized representation of markets. A more realistic perspective, inspired by institutional economics, departs radically from this idealization. Institutional economists treat markets as one of numerous social constructs or institutions within a historical process. “Private property”, which is taken as a given in neoclassical theory, is merely one of possible configurations of property rights observed throughout history.

The task of applying institutional economics to developing country agriculture was taken up by early development economics. One important dichotomy in this literature is between traditional and modern institutions and cultural values. The classic paper of Johnston and Mellor (1961) describes possible impediments to agricultural modernization in terms of the traditional group constraints, attitudes towards change; perceptions of personal gain from the adoption of modern technologies, availability of market exchange outlets, and so on. Tenurial reform is identified as “the most essential requirement” to modernization, as traditional tenancy is the main obstacle to the formation of market – based agriculture.

Traditional tenancy is characterized by patron – client relationships and sharecropping, which are seen as institutional impediments to commercialization. Under the patronage system, the landowner offers an output share to the tenant in exchange for cultivation rights. The landowner also provides consumption loans, with effectively a transfer during times of emergency; this effectively guarantees a minimum subsistence to the tenant. The patronage system meanwhile obligates tenants in various ways, such as in rendering miscellaneous services as well as political support. These institutions characterized the manorial or feudal system in medieval Europe as well as agriculture in Southeast Asia.

The persistence of traditional structures is a serious obstacle when more commercialized transactions are superior ways to organize production. For instance, under share tenancy labor is paid below its marginal product, hence we expect a below optimum level of effort – the “Marshall critique”. A move towards either a straight wage contract or a fixed lease contract would pay factors their marginal product and improve allocative efficiency.

Between these two - neoclassical economics and institutional economics - who has a better approximation of reality? Or is it something in between?

Monday, January 22, 2007

Impact of land reform: neoclassical perspective

To understand the impact of land reform, you have to view it from a theoretical perspective. The neoclassical perspective is one most familiar to economists. The neoclassical school treats land like any factor of production. The entrepreneur – an individual decision-maker - combines land, labor, capital, and material inputs, to produce output. The services of the factors of production must be purchased from other individuals who possess private property rights over the factors (unless the entrepreneur herself is the owner). The entrepreneur receives the proceeds from the sale of the output. The difference between revenue and cost (payments for all factors of production) is profit. The relationship between factors and outputs is represented by a production function, which expresses a particular state of technology. Entrepreneurial decisions are motivated by maximization of profit.

Markets are assumed to be perfectly competitive. Now suppose we define an "efficienct" allocation as follows: an allocation is efficient if any reallocation would inflict at least as much harm to losers as benefit to gainers. Neoclassical theory concludes that the way the market allocates resources, such as land, is efficient.

This all sounds very abstract. What are some practical predictions of the theory?

1. A government-administered reallocation of land from landowners to cultivators would likely reduce agricultural output.

2. Rent ceilings and transfer restrictions on agricultural land will reduce investments in land improvement, and encourage conversion to non-agricultural land.

The first opposes the claim that land reform would lead to a more efficient allocation of land. The second hypothesizes that agricultural land productivity and supply of agricultural land would decline under land reform.
Obviously the blokes who thought about land reform were not reasoning from a neoclassical perspective. What was the theoretical underpinning of land reform? Next week.

Sunday, January 14, 2007

University of the philistines

The raging issue in my alma mater is the increase in tuition fees. Long held at 300 pesos per unit (a little over US$ 6), in real terms this is now a little less than a third of its value when it was first set years ago. The proposal therefore is to raise it to about P1,000 (in the largest campuses) and thereby recover lost value. (Please check out this page and links to learn more about this issue.)

Of course, I should not expect the buyers (students) to take this lightly. It is an opportunity to rehash tired old bromides as the following:

Mr. Alfonso, has been quoted as saying that it is wrong to use students as a “source of income” for the university. “They tell us that it’s not the government’s role to subsidize tertiary education, but we believe otherwise.” (PDI, 24 November). During the congress of student councils held in Davao, which I personally attended, Mr. Alfonso declared that the difference between the students’ position and that of the UP administration was “philosophical.” In other words, their position is that tertiary education should be entirely subsidized.

Me too! It is my position that economists be entirely subsidized. Heck, it is my position that people who blog should be subsidized, as well as people with a fondness for Booksale pocketbooks. Furthermore, I demand as my unique inborn right to be subsidized because I am, er, in my mid-thirties. Yes, I demand to be subsidized because I take the MRT and I don't have a pet! That's my philosophy. Now if I can just round up a posse to lynch opponents of my sacred subsidies, I would demonstrate the depth of the values inculcated into me by my alma mater. So let us sing our school song:

UP naming mura, pamantasang hirap.
Ang bariya namin,
Sana'y iyong tiisin.
Malayong lupain,
Hasikan man ng lagim
'Di rin magbagago ang palamunin (2x)

Luntian at pula
Sakim kami kailanman
Ipagdiwang natin
Bulwagan ng hangal.
Humayo't ipagkait
Ginto at katapatan
Mabuhay ang pagpapakasasa sa pondo ng bayan (2x)

Monday, January 08, 2007

Doctors, nurses, economists, and fools

An old story (dating back to 2004) has been picked up and updated in the major US news services (example). It's about the medical exam topnotcher, Elmer Jacinto, who is now working as a nurse in New York.

The article draws attention to a major Filipino daily, who called Elmer a "sellout," and a columnist who condemns his "deplorable ambition". (Parallel Universes excerpt from these reactions.)

Such condemnation is foolish, ignorant, and stupid. Elmer is simply exercising his right to make a living, wherever and however he sees fit, without exercising fraud or violence. To say that he is "depriving" the Philippines of his medical skills, presumes that Filipinos have the right to demand Elmer to supply his services to them. There is no such pre-determined right. The right to demand Elmer his services belongs solely to his buyers, because of his standing promise to exchange services for fees.

It does however appear odd that a very bright medical doctor is spending his time dressing wounds and sticking needles into buttocks. Elmer is very likely to be more capable than many of the doctors ordering him about. Are markets stupid? No - government intervention is. The modern professional licensing system, firmly entrenched everywhere (including the United States), is preventing Elmer from being deployed in the job where the value of his service is highest. That's all there is to it. Contrary to popular belief, the United States is not an apostle of free markets, but rather a major heretic.

I am very thankful I belong to a profession that does not have licensing requirements. On the downside, a lot of fake "economists" though are getting away with pretty idiotic public pronouncements. Still, we seem to be doing pretty well even without the market distorting props of professional licensure.

We economists like to practice what we preach.

Monday, January 01, 2007

The transformation of Negros

Last month I visited Negros island, in West-Central Philippines, the country's "sugar bowl". The west part especially (Negros Occidental) is covered with vast sugarcane areas, previously organized into haciendas, large estates under one landowner. Here enormously rich hacenderos accumulated enormous wealth, while poor resident workers lived on their vast estates. These workers grew to depend on the hacendero for their daily needs, depending on the vale (cash advance) for medical emergencies and other consumption needs. Sometimes the workers formed communities (complete with church and school) right on the hacienda. Meanwhile the hacendero class grew to wield great political power, entrenched itself at the forefront of the traditional elite of the country. It was a textbook example of modern-day feudalism, alive and kicking in the developing world.

In 1988, the Philippines embarked on its last and most extensive program of land reform, the Comprehensive Agrarian Reform Program (CARP). The CARP implements a law imposing a five hectare limit to total agricultural landholdings, with the excess to be distributed - with compensation - to tenants and other qualified beneficiaries. Unlike previous programs, the CARP would cover everything - including the hitherto untouchable haciendas.

The modern feudal lords have battled the redistribution program. Negros Occidental, which has the country's largest potential area for land reform (over 280,000 ha), has the lowest redistribution accomplishment (about 55%). Yet land reform has gone farther than most had expected in the late 1980s, forever transforming the face of the Negros countryside.

Not always for the better. First, land reform prohibits the transfer of land from beneficiaries to other parties (except by inheritance), for ten years after award of the land. In the medium term this has taken land away from enterprises with access to working capital (the haciendas) to enterprises without such access (the beneficiaries' farms). Sugarcane yields have reportedly dropped, as ideal input intensity cannot be achieved in the beneficiaries' farms. Second, the miscellaneous consumption financing offered by traditional sugarcane landlords did serve a useful function - which is completely disabled by land redistribution. Post-feudal forms of finance (i.e. the commercial banking system) has so far failed to deliver adequate financing to the new class of landowners.

But has land reform been a complete catastrophe? Far from it. Sugarcane yields do not seem to have seriously suffered owing to land reform. Check out the following graph, which shows the average yield in tons of cane per ha per year in the Philippines. Despite all the problems, somehow the sugarcane industry, post-CARP, is still doing well. That means the new landowners are probably enjoying a higher standard of living than without the program – they receive the profits from the land, rather than just wages. I am getting much of this information from my land markets study, a sub-component of a bigger study assessing the impact of agrarian reform in the Philippines. I can confirm that many of the new landowners do lease out their lands to big sugarcane planters, and end up earning wages from the leased out land. Despite the apparent irony of the situation, it is clear that they are better off than before the program, because they receive lease rental in addition to wage. Furthermore, most who practice this do not in fact lease out all their land, and seldom is this practiced on a permanent basis.

So are the sugarcane workers better off with than without the Program? I wouldn’t know the answer to that – yet. But I do know that a lot of distortions is poisoning the discussion about the future of land reform. The last thing this country needs is policymaking by hyperbole.