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Klaus Deininger, Daniel Ayalew, Tekie Alemu

Land Rental in Ethiopia Marshallian inefficiency or factor market imperfections and tenure insecurity as binding constraints?. Klaus Deininger, Daniel Ayalew, Tekie Alemu. Motivation. Land is a key productive asset and source of income

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Klaus Deininger, Daniel Ayalew, Tekie Alemu

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  1. Land Rental in EthiopiaMarshallian inefficiency or factor market imperfections and tenure insecurity as binding constraints? Klaus Deininger, Daniel Ayalew, Tekie Alemu

  2. Motivation • Land is a key productive asset and source of income • the livelihood of more than 80% of the population depends on subsistence agriculture • Scarce land endowment under the threat of degradation & high level of climatic shocks • Productive use of land & land markets important for poverty alleviation – directly & indirectly

  3. Objectives • To explore the efficiency of sharecropping in the context of state-controlled land ownership • Marsahallian inefficiency VS costless monitoring and enforcement of contracts • To investigate the extent to which land markets bring the ratio of inputs into line for efficient production • focus on the role of transaction costs and imperfections in other input markets (labor and oxen)

  4. Ethiopian context: framework • Land policy: constitutional “use rights”, but the policy is still ambiguous • everyone who wants to engage in agriculture has the right to receive a piece of land for free • this provision may conflict with the desire for greater tenure insecurity • rental allowed with restrictions; but sale, exchange or mortgage is prohibited • responsibility for enacting laws is transferred to regional governments

  5. Ethiopian context: regional policies • No clear cut position regarding redistribution • upon request of the community (Amhara, Southern) • redistribution of irrigated land (Amhara, Oromia, Southern) • no clear statement about redistribution in Tigray • Restrictions on rental markets • can rent out only 50% of their holdings (Oromia, Southern) • A holder can lose his use rights if permanently employed in non-farm activities (e.g. Amhara) - implications on long term rental contracts & off-farm employment

  6. Ethiopian context: final remark • Legal provisions lack clarity & weak institutions to interpret regulations and adjudicate in case of disputes • 47% of households in our data expect to gain or lose land due to redistribution • 1997 Amhara redistribution is still fresh • limit investment incentives and the propensity to rent-out land • Recently launched ambitious land certification program (6 mn households by late 2005)

  7. Evidence for Ethiopia • Empirical evidence: • no Marshallian inefficiency in terms of variable input application (Fafchamps and Pender 2006, Gavian and Ehui 1999; Kassie and Babigumira 2006) • mixed results regarding the role of rental market in making adjustments towards desired cultivated area • partial adjustment (Teklu and Lemi 2004, Holden and Ghebru 2006) • relatively efficient land lease market (Fafchamps and Pender 2006)

  8. Data • A three years panel data from Amhara highlands (covers 1999, 2001, and 2004 agricultural years) • 1520 randomly selected households from 12 villages (kebeles) in 6 districts (woredas) • Detailed household and plot level information • household resource endowments, participation in different markets, input and crop output at the plot level, etc.

  9. Descriptive statistics

  10. Model: Marshallian inefficiency • Test for the differences in input intensity and yield on owned and sharecropped plots of the same household (Shaban 1987) • Estimate household fixed effects model of yield and input intensity functions on ownership dummy, plot characteristics and time-varying district dummies • Test if the coefficient of ownership dummy is statistically different from zero

  11. Model: optimal adjustmentFriction model (Rosett 1959) • This model accounts for three observations: positive, zero, and negative net land leased-in • We allow for asymmetric coefficients • Right-hand side variables: owned land, other input endowments (family labor and oxen), wealth indicators and other household characteristics • We extend the model to capture farming ability • Measurement of farming ability • use household fixed effects from a panel Cobb-Douglas production function

  12. Empirical Results

  13. Conclusion • No evidence for Marshallian inefficiency; • Evidence of huge inefficiencies in terms of resource adjustments due to the presence of transaction costs (large part of it is likely to be policy induced), but helps to transfer land to more productive farmers; and • Policy implication: focus on identifying factors that prevent adjustment to desired level of cultivated land (e.g. tenure insecurity) • Implications on off-farm employment

  14. Model: optimal adjustment

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