Land tenure and agricultural efficiency: The limits of the land rental market

Increasing competition for agricultural land in many parts of the world has led to a reduction in land accessibility for the most marginalized and impoverished farmers. In many instances this forces such farmers to expand agricultural production into less desirable, more ecologically sensitive spaces. This expansion can aggravate resource degradation through soil erosion, deforestation, and reductions in surrounding water quality.

These environmental consequences have increased an interest in systems of agrarian reform to increase land access and reduce expansion into vulnerable areas. However, there is disagreement about how such reform is best accomplished. In simple terms, there are those in favor of an approach focused on formalized titling of land, an approach that assumes that more efficient land markets will arise from an increase in legally secure property rights. In contrast, there is also a security- and rights-based approach that critiques the former. This approach notes that formalizing land titles may be unnecessary in many instances, as social institutions may provide more assurances to land access than legal systems. Moreover, these efforts can lead to additional exploitation and marginalization of land-insecure farmers.

With an understanding that formal property rights are not an unfailing answer to issues of land security, recent studies have focused on how a combination of land contracts and formal property rights impact land rental markets — the markets used by those without formal ownership of land.  A recent study based on an economic modeling system known as "stochastic production frontier analysis" found that increased provisioning of land titles through formalized agrarian reform has not observably increased efficiency in the land rental market. In an efficient land rental market, inefficient farmers would rent or sell land while efficient farmers would rent or purchase additional land.

The study, which was published in the Journal of Agricultural Economics, was based on data collected from southern Palawan, a sparsely populated province in the Philippines. The site is significant as the country implemented a uniquely formalized system of agrarian reform in 1988 through the enactment of the Comprehensive Agrarian Reform Law. Data collection lasted for eight years, during which farmers were each interviewed four times. The variables considered in the analysis of efficiency included: yield, labor rates, fertilizer use, pesticide use, silt problems, farm size, farmer age, number of carabao (draft animals), and percent of crop area owned. These characteristics were evaluated relative to tenure status, either rented or owned. Statistical modeling was employed to answer two questions: first, the effect of parcel ownership on technical efficiency; and second, whether parcels that are continually owned are consistently more efficient over time than parcels that are always rented.

The findings to the first question were unsurprising. Land that is owned exhibits higher levels of technical efficiency than land that is rented. However, when observed over time the variable of being always owned or always rented had no impact on efficiency. The study further found that where informal land rental occurs, the contracts exhibit security, leading the authors to conclude that their case study presented an instance where legally vested land titles have been ineffective, while informal rental agreements have been effective.

Ultimately, the authors interpret the finding of a strong correlation between tenure structure and technical efficiency to indicate that there is allocative inefficiency in the land rental market. The inverse finding regarding the relationship between unchanging, long-term tenure arrangements and efficiency is interpreted as indicating security among those who rent land. Taken together these findings indicate a failure of formal land titling efforts to stimulate efficient rental markets, while informal rental contracts provide security to farmers who farm under them.

Compellingly, the authors hypothesize that such findings indicate a failure of formal titling campaigns lacking a companion effort for land redistribution. This hypothesis presents a significant question with potentially critical information to the conversation about effective agrarian reform.  Such a possibility compels further inquiry into how access to land might be most effectively produced in order to spur the land's most efficient use.