Emerging Challenges of Land Rental Markets A Review of the Available Evidence for Central and Eastern Europe and Former Soviet Union Countries

2 Importance of land market development Transfer land from less to more efficient producers Transfer land from less to more efficient producers  Efficiency impact Land transfers allow productive but landless households or households owning little land to access land Land transfers allow productive but landless households or households owning little land to access land  Equity impact Land sales markets provide a basis for the use of land as collateral in credit markets Land sales markets provide a basis for the use of land as collateral in credit markets The ability to formally prove land ownership at low cost and to transact land will stimulate the development of formal financial markets and access to formal credit for rural households The ability to formally prove land ownership at low cost and to transact land will stimulate the development of formal financial markets and access to formal credit for rural households Result: important equity and efficiency impact Result: important equity and efficiency impact

3 Problems with the land market development Transaction costs that complicate or impede land transfers decrease efficiency. Transaction costs that complicate or impede land transfers decrease efficiency. Land markets in the transition countries are still characterized by the existence of significant transaction costs in the rural land markets, constraining access to land for rural households willing to start up or enlarge their farm and reinforcing the persistence and dominance of large scale corporate farms. Land markets in the transition countries are still characterized by the existence of significant transaction costs in the rural land markets, constraining access to land for rural households willing to start up or enlarge their farm and reinforcing the persistence and dominance of large scale corporate farms. Transaction costs include official registration and notary fees but also search costs to find potential landlords/tenants, negotiation costs to set contract terms, costs to enforce contract terms, withdrawal costs Transaction costs include official registration and notary fees but also search costs to find potential landlords/tenants, negotiation costs to set contract terms, costs to enforce contract terms, withdrawal costs Result: incomplete records, absence of or unclear boundary definition, unknown owners, unsettled inheritance claims within families, and incomplete information all increase transaction costs Result: incomplete records, absence of or unclear boundary definition, unknown owners, unsettled inheritance claims within families, and incomplete information all increase transaction costs

4 Why rental markets matter? Land renting is fully consistent with modern agricultural practice Land renting is fully consistent with modern agricultural practice Is widespread in developed economies Is widespread in developed economies Can have positive effects on income distribution and poverty reduction Can have positive effects on income distribution and poverty reduction Can provide these benefits with more flexibility and lower transaction costs Can provide these benefits with more flexibility and lower transaction costs

5 Positive effects Households with more human capital (younger, better educated) access land through a combination of buying and renting land, and rental markets contribute to increased returns to labor on family farms. Households with more human capital (younger, better educated) access land through a combination of buying and renting land, and rental markets contribute to increased returns to labor on family farms. Older and less educated households rent out land to get additional incomes, and those who can rent out their land if they wish, have higher welfare. Older and less educated households rent out land to get additional incomes, and those who can rent out their land if they wish, have higher welfare. Rental markets have the potential to reduce inequality of access to land by transferring land from households with high land endowments to those with low land endowments. Rental markets have the potential to reduce inequality of access to land by transferring land from households with high land endowments to those with low land endowments.  Important to improve access to land for rural households

6 Key findings on land rental markets in transition countries In ECA countries renting land is more common than buying In ECA countries renting land is more common than buying There are large country differences in the share of rented land and this is highly correlated with the importance of corporate farms. There are large country differences in the share of rented land and this is highly correlated with the importance of corporate farms. Almost all registered family farms own some land and rely on a mixture of rented land and owned land for cultivation. Almost all registered family farms own some land and rely on a mixture of rented land and owned land for cultivation. Unregistered family farms mostly own a small amount of land and rely almost entirely on this land for their cultivation. Unregistered family farms mostly own a small amount of land and rely almost entirely on this land for their cultivation. Corporate farms own very little land and rely almost entirely on rented land for cultivation. Corporate farms own very little land and rely almost entirely on rented land for cultivation.

7 Findings - Moldova Registered family farms are renting land (23%) as well as buying (23%); Registered family farms are renting land (23%) as well as buying (23%); while un-registered family farms are mostly renting out land (38%) but not selling. while un-registered family farms are mostly renting out land (38%) but not selling. More than 85% of the land used by corporate farms is rented. Only around one third purchased land but the amount is very small compared to the cultivated land area. More than 85% of the land used by corporate farms is rented. Only around one third purchased land but the amount is very small compared to the cultivated land area. Half of the agricultural land is used by corporate farms Half of the agricultural land is used by corporate farms

8 Key findings on land rental markets in ECA – some tables/figures Share of households that are Renting in land Renting out land Moldova (2004) RFF 234 Moldova (2004) UFF 438 Class 1: 0-1.8; Class 2: ; Class 3: ; Class 4: ; Class 5: 6.6< Share of households that are Selling land Purchasing land Moldova (2004) RFF 223 Moldova (2004) UFF 25

9 Moldova Unregistered family farms Amount of land owned 2.5 Amount of land cultivated 1.5 Share of households that sold land 2 Share of households that purchased land 5 Share of households that rent in land 4 Share of households that rent out land 38 Key findings on land rental markets in ECA – some tables/figures

10 Constraints and Imperfections: Land Transaction Costs Transaction costs rise when: owners of the land want to withdraw and reallocate their land from the historical users – most often Corporate Farms owners of the land want to withdraw and reallocate their land from the historical users – most often Corporate Farms property rights are unclear or insecure (e.g. co-ownership of rights, land code changes regulary) property rights are unclear or insecure (e.g. co-ownership of rights, land code changes regulary) there are excessive or high notary fees, taxes and other administrative charges there are excessive or high notary fees, taxes and other administrative chargesResult: Corporate farms dominate land use and land rental Corporate farms dominate land use and land rental Rental prices paid by corporate farms are often much lower than rental prices paid by individual farms  more difficult to access land for land-poor but efficient households  efficiency losses. Rental prices paid by corporate farms are often much lower than rental prices paid by individual farms  more difficult to access land for land-poor but efficient households  efficiency losses. Corporate farms are more likely to pay in kind, a less transparent payment system  less liquidity for land owners  welfare losses Corporate farms are more likely to pay in kind, a less transparent payment system  less liquidity for land owners  welfare losses

11 Corporate farms are more likely to pay in kind, a less transparent payment system. It is often older and less educated land owners who gain additional income through renting out land It is often older and less educated land owners who gain additional income through renting out land Payment in kind may come late or not at all – decreasing the welfare benefits of renting out Payment in kind may come late or not at all – decreasing the welfare benefits of renting out

12 Constraints and Imperfections: Credit market imperfections When financial markets do not work well or where confidence in money as a repository value is low Land has to be purchased out of own savings, leaving little liquidity to invest in technology, equipment or quality inputs; Land has to be purchased out of own savings, leaving little liquidity to invest in technology, equipment or quality inputs; Land is a storage of wealth; Land is a storage of wealth; Land may be purchased as a hedge against inflation or as an investment asset; Land may be purchased as a hedge against inflation or as an investment asset; Result: efficiency of land sales market is constrained  stimulating the development of rental markets becomes even more important

13 Constraints and Imperfections: Labor market imperfections Labor market constraints may be a fundamental cause of fragmentation and a combination of improved off-farm employment, retirement schemes and rental markets can help to address the major land consolidation. - No evidence that fragmentation of land ownership causes fragmentation of land use - Fragmentation has less to do with the land market than with the labor market. Result: - Rental markets have allowed countries to overcome fragmented ownership for consolidated land use  Priority should be given to stimulating land rental, rather than consolidation projects - To solve the land fragmentation problem it is important to tackle labor market problems.

14 Conclusions To realize the potential of land rental markets, governments need to turn their attention to creating the enabling environment and supporting infrastructure for these markets to develop. To realize the potential of land rental markets, governments need to turn their attention to creating the enabling environment and supporting infrastructure for these markets to develop. Government action can be organized in 4 broad categories. Government action can be organized in 4 broad categories.

15 What governments can do. 1. Secure individual property rights by focusing on reducing transaction costs, completing demarcation, improving land administration systems, guarenteeing a stable land code, enhancing transparency and improving access to information on the land market.

16 What governments can do. 2. Encourage efficient land rental markets while protecting the rights of small landholders by providing better information about transactions to small land owners to enhance their bargaining power, and providing trusted mechanisms for resolving contract disputes.

17 What governments can do. 3. Activate the land rental market by addressing constraints in other markets: in credit and output markets to help family farms become more competitive and stimulate the demand for land; and in labor markets to facilitate both the movement of labor out of agriculture and the release of agricultural land.

18 What governments can do. 4. Prevent further land fragmentation and complicated land ownership arrangements by simplifying laws and procedures to divide land among heirs.