Presentation on theme: "Hans P. Binswanger and Mark R Rosenzweig"— Presentation transcript:
1 Behavioral and Material Determinants of Production Relations in Agriculture Hans P. Binswanger and Mark R RosenzweigJournal of Development Studies, 1986
2 ObjectivesAnalyze the institutions governing production and exchange of output and primary factors of production in rural areasIncorporate risk and information constraints, together with the material attributes of agricultural production and production factorsAnalyze barriers to markets for credit and insurance, and land sales marketsAnalyze the causes of diseconomies of scale in agriculture, and the reasons for the existence of plantation agriculture
3 Two simultaneous problems of agricultural households Achieve high levels of incomes, consumption and leisure (one period problem)To even out consumption in the face of risk, and to avoid disasters (over time problem)In economics we separate these problems by assuming that we have inter-temporal markets for risk and credit (Arrow and Debrew)But these are generally non-existent in agriculture or highly imperfectTherefore the inter-temporal functions have to be solved in output and factor markets, by building reserves, or via social relations
4 Initial Assumptions Individuals face many risks Information is costly Individuals are self interested, they value consumption and dislike effortIndividuals are risk averse
5 Initial consequencesAsymmetric information in labor, credit or insurance marketsIncentives problems: moral hazard or adverse selection – leads to share cropping in rental marketsImperfect enforcement of property rights – eg theftDesirability of broad spectrum of insuranceCollateral requirement for larger loans
6 Consequences for credit market Credit rationing for borrowers without collateral (even at higher interest rates)If there are no insurance markets, credit becomes and insurance substituteCollateral assets mustbe appropriable,not carry asset-specific risks,returns must accrue to the borrower
8 Basic agricultural assumptions Heterogeneity of land and peopleSpatial dispersion and high transport and travel costsHigh cost of acquiring informationLeads to aggravation of asymmetric informationSeasonality of production, and synchronic timing of operationsMany sources of risk: from weather and yield, price, timing uncertainties, life cycle risksCovariance of risks in small agricultural areas!
9 Absence of crop insurance High travel costs makes sales and cost of damage assessment expensive, and increase moral hazardPotential solutions:Insure only catastrophic events such as hail or floods which are easy to observe: specific risk insurance widely availableIndex-based insurance that insures a weather event, not the yield risk (has many problems)High covariance of riskAll farmers experience loss in the same yearLeading to bankruptcy of the insurerCombine farmers from different regions or different countriesbut this solution aggravates problems 1The combination of problems 1, and 2 has proven insurmountable for market- based crop insurance
10 Problems of financial Intermediation Because he is locally based, the rural moneylender has superior information about clinets, little moral hazardHowever, rural moneylenders do not take deposits but lend only out of equity – WhySeasonality: At harvest time all farmers would want to deposit money, and withdraw it at sowing timeIf moneylender lends the deposits out, he cannot return the money to the depositors at sowing time, or give additional loansCovariant risk: If moneylender lends out deposits, and the crops fail, all depositors will want to withdraw funds at the same time, and more people will want to borrow.Reserve banking in villages is therefore not possibleThis explains why banks have historically moved into rural areas only very late, and why they often primarily mobilize savings
11 Possible solution: Insure the credit or deposits Has been tried in many countries to make agricultural credit more widely availableHas mostly failed for the following reason:Crop insurance and credit suffer from the same problems of high sales and monitoring costsThey also suffer from the same co-variance problemYou cannot shift the problems from one institution to another one that faces the identical underlying material conditions and problems.
13 Consequences Seasonal underemployment The need for supervision of laborRising labor costs with size of operational holdingIncentives issues are a necessary and sufficient condition for this feature. (Neither friction in the labor market or uncertainty of supply are needed)Relationship between the size of the family labor force and the size of the operational holdingThese are joint consequences of the behavioral and technological characteristics of labor arrangements in agriculture
14 Lower bounds on operational size of farms: animals and machines Animals and machines are lumpy inputsThey are fragile and require high maintenance costsCombined with incentives issues this makes long term rental very difficultGiven the labor cost advantage of family labor, seasonality and synchronic timing of operations, it is more profitable to use animals on machines on your own farm rather than hire them out separately.Operating a farm without owning draft animals therefore is very difficultwe obtain a lower bound on farm size.When technology shifts to mechanization, the lower bound may rise
15 Management skills and lower and upper bounds Management skills: for (1) supervision,and (2) for decisions under uncertaintyIndivisibility of management skills cannot be circumvented by a rental market for management so we have another lower boundBut given heterogeneity of land, supervision of workers becomes less efficient at larger scale, and so are the decisions taken under uncertainty.For given family labor force, hired labor costs therefore rise with farm sizeThis will normally lead to diminishing returns to scale in farming.At any given time there is therefore an optimum distribution of operational farm sizes
17 An application to land scarce environments (e.g. India) Property rights in land (or use rights) are well developedLand has value and has value as collateral or as a collateral substituteCost of capital decreases with size of ownership holding (but not with the size of operational holding)No institutional barriers on any markets, including land rental or saleFinancial and insurance markets are poorly developedCompetition among agents
18 Is there also an optimal ownership distribution? A landless individual with farming skills and draft animal will find it optimal to rent in land rather than hire his labor and animals out separatelyLarge owners can gain by renting out land to small famersbecause of the lower labor costs of the tenantsThe operational distribution of land will therefore be more equal than the ownership distributionThe cost of rental arrangements will rise little with the number of tenantsThere is therefore no upper bound on ownershipThe ownership distribution is largely indeterminate
19 The land sales marketIn normal agricultural periods there will be few land sales in normal periodsFew small sellers, because it is more profitable to cultivate your own landThere will be few demanders of land: because you cannot use land as collateral to purchase landThe land has a collateral value, and you need to pay both for that value as well as for the discounted profits from agricultureIf you mortgage the purchased land, your profits will be insufficient to pay for the interest and repayment.
20 In very good agricultural years All farmers have money and would compete for the purchase for land, while few would want to sellVery few transactions in good years
21 In very bad agricultural years (or a sequence of bad years) The labor market vanishes, as there is no demandFarmers would have to sell assets in order to feed themselvesOnce assets are depleted, they will resort to distress sales of landBecause of covariance of risk, other farmers do not have any money to buy landOnly moneylenders would be able to purchase land, using the value of debts of farmers, as well as extra cash, to pay for itLand will accumulate in the hands of moneylenders
22 ImplicationsThe land rental market enhances efficiency of agricultural production,because it transfers land from large owners with high labor costs to tenants with much lower labor costsThe land sales market, via distress sales, transfers land from the small farmers to moneylenders,who have no comparative advantage in farmingIt is therefore efficiency reducing and inequality increasingOver the history, this has led to periodic needs for land reform, from the Roman Empire to India and China
23 Why are there plantations Sugarcane, tea, bananas for exportsThere are economies of scale in the sugar and tea factories and in the huge banana boat.But there are also economies of scale in grain mills, yet we do not have any grain plantationsSugarcane and tea have to be processed within hours from harvest, and a whole banana boat has to be filled in 24 hours, sealed and refrigerated to avoid spoiling of the bananasThis creates enormous coordination problems between the farms and the plant or boat, with planting and harvesting having to be coordinated tightlyThis can be solved by having a large farm with a single management – a plantationOr by the use of contract farming
24 Other topics explored Farm size, factor ratios and productivity Technical change and the alterations of production relationsMechanizationYield increasing technology – Green RevolutionDry season irrigationProduction relations in land abundant areasNext time: Power, Distortions, Revolt and Reform