Introspective
Business World, 15 December 2014

 

 

The village of Xiaogang was the birthplace of the first agricultural revolution in China. It was called the Household Responsibility System which allowed farmers to produce for sale in the market rather than for the collective and saw farm productivity soar. The Chinese leadership recognized what was already going on underground and legalized it. It was the success that begot the subsequent Chinese Economic Miracle following as it did the self-same strategy — let the market work its magic. The offspring however became so speedy that the parent choked in its dust. The income gap between the farm and non-farm dwellers (threefold) has become too stark and rural poverty socially threatening. Forcible requisition of farmlands by the authorities to give way to more lucrative commercial projects has triggered violent protests. In China, the state alone owns the land and all farmers are leasehold tenants under contract so the state. The economics of small farms (average 1.6 acres in China versus 400 acres in the USA) heavily favors conversion to other uses.

Enter the Third Plenum of the Chinese Communist Party in Nov 2013. Among other things, it adopted the program called Liuzhuan (literally “transfer”) which allows the transfer of land-use rights through mortgage or rental (specifically the operating rights) not previously allowed. Underground praxis was again the trigger. It prompted the idea of allowing larger-scale commercial farms exploiting scale economies and raising farm productivity. This will increase the competitiveness of agriculture vis-à-vis the other modern sectors. Xiaogang is again leading the way. The experience of farmer Zhang Hongli who cultivates watermelons in 197 acres once farmed by three villages is iconic. He makes a tidy profit and the enterprise pays rent of about $150,000 per year. The big difference is scale economies and access to financing. Farmers who opt to rent to Zhang collect $500 on in rent, flood or draught. It thus acts like a social safety net.

The state-run Yangling Rural Commercial Bank reports giving about $3 million in farm loans following the Liuzhuan program. But lending is limited only to large-scale vegetable and fruit farmers. The rest, among them small-scale grains farmers, don’t get loans because, as the manager says: “The rest don’t pay.”

But somebody has to do the consolidating. In Yangling, a land bank was set up to consolidate land-use rights. It offers these for rent to prospective enterprises for a fee per acre of land per year. Farmers are empowered by the choice between leasing their land and collecting that rent or farming their own land. This allows the cultivation of the larger tracts by the most able thus serving the efficiency rule called the Coase theorem! Economies of scale exploited with larger farms deliver large economic surplus. (For more on Liuzhuan, please see, e.g., Ian Johnson, Oct 2014, NY Times and Li Ping, Oct 2014, Bloomberg Briefs). A similar land lease program in Taiwan, where holdings are even smaller, called “Small Landlords, Big Tenant Farmers” started in 2009 and leased 2500 hectares in just one year raising the average farm size in target areas to 13 hectares from 1.1 hectares.

Why should this be of interest to us? Our average farm size is small (< 2 hectares) and mostly economically unviable. Because of CARP, land ownership ceiling is 5 hectares and the market for farmlands does not exist except underground. Access to formal finance is absent for most small farmers for the same reason as in China: inability to pay on the one hand and to foreclose in case of default. As a result, poverty is most rampant in rural areas. We have to move towards scale-efficient modern commercial farming to attract private capital.

Consolidation is already happening but illegally and underground where farmers are getting much less than they should if there is an open market. We must now encourage legal consolidation. What will that take? The Liuzhuan system is a good start: CLOAS, individual or collective, can be declared legally leasable (Section 27 of CARL has to be modified). As in China and Taiwan, the development of larger-scale farms must be encouraged rather than tabooed. Lease contracts could be struck between farmers and between farmers and private consolidators. DAR can even offer a land brokerage service to bring private investors and farmer groups together in a long-term lease contract. These larger firms will act as natural pipelines reconnecting agriculture to the formal banking sector. Farmers meanwhile choose between becoming rentiers (lease and receive the rental fee) or farming their own lands. Either way farmers don’t lose connection with the land. This is especially useful for lands under collective CLOAS since rent revenues can be more easily and equitably allocated to beneficiaries than land parcels. Still and all, this movement remains second best as it incurs the higher transactions cost of contracts rather than straight ownership if the 5 hectare ceiling is lifted.

Would that the New Year brings a new openness to new ideas. Merry Christmas and the best of the New Year!

Note: I’d like to thank friend and fellow contributor, Mr Calixto Chikiamco, for putting me on the trail of tradable property rights.