Land Reform in South Africa: Selected Issues: Land Reform in South Africa: Selected Issues
Rogier van den Brink
Country Economist, South Africa
The World Bank
Presentation to SACOB Conference
Johannesburg
October 11, 2007
Outline: Outline The role of agriculture in growth and poverty reduction
How agriculture is organized matters a lot
South Africa’s potential for land and agricultural reform
Why is it going so slow?
Some ideas about the role of the private sector
The role of agriculture in growth and poverty reduction: The role of agriculture in growth and poverty reduction
Poverty reduction: international trends: Poverty reduction: international trends Global decline in the incidence of poverty (US$1/day):
28 percent in 1993 to 23 percent in 2002
Caused entirely by rural poverty reduction, while urban poverty has increased
More than 80 percent of the decline in rural poverty was due to improved conditions in rural areas
Migration is not the main instrument for rural, national and global poverty reduction
Improved rural conditions are, with agriculture as the main source of growth
Source: draft World Development Report on Agriculture 2008
India’s experience with poverty reduction: India’s experience with poverty reduction Effect of Urban Growth
Urban growth reduced urban poverty
... but had adverse distributional effect within the urban sector
... there was no positive spillover of urban growth on rural poverty
Effect of Rural Growth
Rural growth was distributionally neutral in the rural sector
It sizably reduced rural poverty
Rural growth also had pro-poor distributional effects on urban poverty
This reinforced the importance of rural growth for national poverty reduction
Poverty responds more to rural economic growth than to urban economic growth
Source:
Several papers by Martin Ravallion and Gaurav Datt, using time series of consumption data from 35 National Sample Surveys spanning 1951-94. This is one of the longest series of national household surveys existing in the world today suitable for tracking living conditions of the poor.
China and Latin America: China and Latin America Similar story for China (1980-2001):
75-80 percent on national poverty reduction was due to rural poverty reduction (with the rest due to migration)
Source: Ravallion and Chen (2007)
Growth in agriculture is more effective in reducing poverty than non-agricultural growth:
For China (a transforming country), agriculture was 3.5 times more effective
For Latin America (an urbanized region), the ratio was 2.7
Source: draft WDR 2008, Valdes and Foster (2005)
Different role for agriculture across countries: Different role for agriculture across countries Agriculture-based countries:
most of Sub-Saharan Africa
agriculture to drive growth and mass poverty reduction
Transforming countries:
most of Asia, Middle East and North Africa, parts of Europe and Central Asia
agriculture to reduce poverty and confront rising rural-urban income disparities
Urbanized countries:
most of Latin America and parts of Europe and Central Asia
to reduce remaining rural poverty
but even where share of agriculture in GDP is small (like in Brazil and Chile):
Agriculture has been the fastest growing sector for over a decade
Providing major investment opportunities for commercial enterprises and large numbers of smallholders
How does agriculture reduce poverty?: How does agriculture reduce poverty? By raising agricultural profits and labor income
By raising non-farm profits and labor income:
via multipliers, see next slide
By causing lower prices of non-tradable foods:
Consumption basket of the poor gets cheaper
Also leads to lower real wages in other sectors, which then grow faster
And, subsequently, under tightening labor markets and higher unskilled wages, economy-wide:
the agricultural minimum wage effectively sets the minimum wage for the entire economy
Sources:
Johnston and Mellor (1961)
Delgado and Alfano (1994)
Draft WDR 2008
Agriculture has large multiplier effects: Agriculture has large multiplier effects Large forward and backward production, and consumer demand linkages:
Agricultural growth multipliers generally vary from around 1.5 to 2.0
Consumption linkages being generally larger than production linkages
Agricultural growth multipliers 3 times as large as those for non-agricultural growth:
Lower rural-urban migration
Sources:
Delgado et al. (1998)
Block and Timmer (1994)
But what about agriculture in South Africa?
Slide10: Agriculture Source: South African agricultural sector review – Evaluation of changes since 1994, J.A. Groenewald – Department of Agriculture Labour multiplier for Selected Sectors Wood & wood products Gold mining Furniture Clothing Food manufacturing Building construction Civil engineering Textiles Trade Beverages Transport Tobacco products Agriculture labour multiplier
International panel of experts (the “Harvard group”): International panel of experts (the “Harvard group”) Ricardo Hausmann and Bailey Klinger, 2006. “South Africa’s Export Predicament.” CID Working Paper No. 129.
50 years of abysmal export performance:
Today, South Africa’s exports per capita are barely higher than in 1960.
South Africa’s status as a natural resource exporter does not explain this poor performance
similar countries have all performed much better in terms of volume, value and sophistication
Which sectors are most suited to absorb the large pool of unskilled labor?
agriculture (rather than clothing and textiles)
Which sectors have the highest strategic value?
agriculture, machinery and equipment, pharmaceuticals and other chemicals
Authors sound a wake up call for the yet unexploited potential of a more ambitious strategy in agriculture
“…there are plenty of countries that either generate much more output for the same amount of employment per hectare, or much more employment for the same amount of value added per worker.”
http://www.cid.harvard.edu/cidwp/pdf/129.pdf
How agriculture is organized matters a lot : How agriculture is organized matters a lot Three aspects relevant for South Africa:
Farm size distribution
Production (family farms, large-scale farms, or collectives)
Location (the geography of apartheid)
I. Farm size distribution: I. Farm size distribution
Countries with more equal land distribution grow faster, permanently: Countries with more equal land distribution grow faster, permanently
Slide15: Country comparisons Source: Deininger (2004), also see work by Acemoglu and Robinson
II. Production: family farms, large-scale farms, or collectives?: II. Production: family farms, large-scale farms, or collectives?
Family farms: Family farms Family farms with little hired labor benefit from the superior incentives of family members to work hard, save, and invest:
This often makes them efficient
Family farms are at a disadvantage in access to markets, credit, technology
The disadvantages rarely offset the advantages from better incentives
Appropriate support system are needed to compensate for disadvantages
Sources:
Large body of literature, but see for instance Berry and Cline, Stiglitz, Hazell, etc.
Collectives: Collectives Production cooperatives/collective farms have failed all around the world
The reasons are conflicts over incentives to work, consume income, and share profits
The variant of labor-managed farms have also done poorly
Cooperative production projects are also often supply-driven and fail because of lack of markets
Abandoned most everywhere, except South Africa…
Not just promoted by government, but also by the private sector!
Individual enterprises do best
But service cooperatives can do well in well in provision of inputs, marketing, finance, and other facilitating role
Note: common property regimes can also function well
Source: Deininger, Klaus. 1995. “Collective Agricultural Production: A Solution for Transition Economies?” World Development, Vol. 23, No. 8, pp. 1317-1334.
Large-scale farms: Large-scale farms Supervision cost of hired labor high, which makes large-scale farms relying on hired labor often inefficient
Variability of land and weather lead to high management and supervision costs
Large farms often produce high yields on their cropland, but leave a lot of arable land fallow or under pasture
Empirical evidence: a century of research found few economies of scale in farm production
Economies of scale exist only where farm production must be tightly coordinated with processing or marketing: e.g. sugarcane and bananas
Contract farming provides an alternative
Then why are there so many countries with very large farms?: Then why are there so many countries with very large farms?
Reduce land available to peasants
By allocating titles to “unoccupied” land
Differential taxation on free peasants
Head, hut or poll taxes in cash or in kind, labor
Restricting market access
Prohibitions, monopoly marketing, concession
Confining infrastructure and services to the farms of the rulers, and/or subsidizing them
Source: Binswanger H, Deininger K & Feder G (1995) Power, Distortions, Revolt and Reform in Agricultural Land Relations. In J Behrman & TN Srinivasan (eds) Handbook of Development Economics, Vol. 3B. Amsterdam: Elsevier
III. Location: the Geography of Apartheid: III. Location: the Geography of Apartheid
Urban Geography of Apartheid: Urban Geography of Apartheid
Rural Geography of Apartheid: Rural Geography of Apartheid
Economic and social costs: Economic and social costs Long distance between job and residence results in very high expenditures on transportation by the poor
Split families: adult job-seekers live in urban townships, while grandparents and children live in communal areas
May encourage HIV/AIDS and crime
Highest population densities on most fragile lands leads to land degradation
Lack of access to high and medium potential arable land by small farmers—currently unused or under-used
High potential arable land is often under forest plantations which have negative effects on water table or soil fertility (e.g. eucalyptus, pine trees)
Forests on arable, non-erosion prone land, and too far down the watershed to protect upper reaches
No peri-urban agriculture
South Africa’s potential for land and agricultural reform: South Africa’s potential for land and agricultural reform
South Africa’s potential for land reform: South Africa’s potential for land reform Substantial amount of under-used land exists in commercial farm sector
Target is 30% of the land redistributed by 2014.
About 83% of agricultural land is held by 50,000 white farmers
But only 4% redistributed since 1994…
Meeting the target would cost:
Around R35 billion or US$5.8 billion
Create 600,000 net full-time farm jobs at about R60,000 per job
South Africa’s unemployment rate is around 25%; 40% if you include discouraged job seekers
No other sector can create quality jobs at such a low cost
While unresolved land issues will lead to instability…
Source: costing updated from Van den Brink, De Klerk and Binswanger in Van Zyl, Binswanger and Kirsten (1996): “Agricultural Land Reform in South Africa: Policies, Markets and Mechanisms.” Cape Town: Oxford University Press.
The employment potential of agriculture has not been realized: The employment potential of agriculture has not been realized Until recently, agriculture and rural development have not figured as priorities
Employment potential of family and part time farming have not been recognized
Since 1994, there has been a huge loss of jobs in commercial agriculture
Expelled workers have rarely been accommodated in the land reform program
Support systems for family farms are poorly developed
Housing and land reform are not yet rearranging the geography of apartheid: Housing and land reform are not yet rearranging the geography of apartheid Housing is often being developed far from jobs
Informal settlements near jobs are not upgraded fast enough
The land redistribution programs are not progressing fast enough
Part time farming near urban centers and in communal areas is not being promoted
While key apartheid legislation is still in place (1975 Township Planning Act, 1936 regressive land taxation, 1970 Sub-division Act)….
Why is it going so slow?: Why is it going so slow?
Land markets need help: Land markets need help The price of land in the market reflects:
Income stream from agriculture
Plus value as asset, hedge against inflation
Farmers can typically only afford to pay the agricultural value
So will be outbid in the land market by the rich
Need to remove all distortions favoring large farmers
Includes scrapping sub-division restrictions
Need subsidies for the poor
Need a land tax
See: Binswanger, Hans, Klaus Deininger and Gershon Feder. 1995. “Power, Distortions, Revolt and Reform in Agricultural Land Relations.” In Jere Behrman and T.N. Srinivasan (eds). Handbook of Development Economics. Vol. 3B. Amsterdam: Elsevier.
Land markets: Sub-division restrictions: Land markets: Sub-division restrictions Restrictions based on pre-independence “viability norms:
income standard
not economies of scale
Prevents small farmers from emerging through the market
Complicates market-assisted land reform
Still in place in Zimbabwe, South Africa, and Namibia
Viability: Viability ”viability”—not in Economic text books
Biology: “The capacity of living, or being distributed, over wide geographical limits.”
“viable farm size”—level of income that is socially acceptable and the farm size needed to achieve this
“minimum wage” for commercial farmers
“viable” farm size—need, say, US$20,000 per year, so need a farm of 1,000 ha
this has nothing to do with economies of scale.
Scrap sub-division act: Scrap sub-division act Sub-division law
sets a minimum “viable” farm size below which no farm can be sub-divided
every sub-division has to be approved by the Minister
Scrap the Act
Protect environmentally fragile or valuable areas (strong legislation is already in place)
Start using the laws and punish those who do environmental damage
Land markets: land tax: Land markets: land tax Politically attractive revenue
Can lower difference between asset and agricultural value of land
But Zimbabwe: aborted because of pressure from Fast Track’s new farming middle class
Namibia:
in progress, initial reports look good
Namibia taxes foreign land owners a higher tax, just like, for instance, Victoria (Australia).
Intermezzo—foreign ownership of land: Intermezzo—foreign ownership of land The perception is that foreigners:
drive up land prices because they are generally more wealthy than local investors
Are less receptive to community and social concerns than South African investors
To keep land prices in check and level the playing field, implement a land tax and tax foreigners at a higher rate
Ensure truly participatory and transparent land use planning and zoning regulations at the local level
Intermezzo—continued : Intermezzo—continued The report correctly says that regulation of land ownership does not undermine investor confidence
But uncertainty does, and unfortunately this report increases that uncertainty
And process of studying, consulting, going to Cabinet, going back to formulating principles, consulting again, proposing legal amendments, consulting again, going back to Cabinet, etc. in and of itself creates a very long period of uncertainty
Intermezzo—continued: Intermezzo—continued There is no attempt made to do an initial “red tape” or regulatory burden analysis when sifting through the options
The solution proposed involves substantial discretionary decision-making by officials (p. 40)
This opens the door wide for so-called “side payments”
Report states that the land tax option was “popular”, and several countries use it (Namibia, France, The US and New Zealand), but it does not feature in the recommendations
Land markets land tax continued: Land markets land tax continued Simple administration:
Area-based assessments, self-declaration
Exempt small holders/poor (e.g. set maximum farm size by agro-climatic zone)
Tax the land
Not the value of improved land, investments (as urban property rates do, including the new Property Rates Act)
Would reduce land prices, average farm size, amount of under-used land, speculative premium
Note: cannot be the only instrument to implement redistribution
In South Africa, the Property Rates Act allows agricultural land to be taxed, but the Act is only being implemented in a few municipalities, with most others pushing the deadline for implementation towards 2009 (the deadline).
Land tax in the old Transvaal….: Land tax in the old Transvaal….
Economies of scale: Economies of scale a 1 ha farm may generate R60 in profits per ha, so R60 in total
And a 1,000 ha farm may generate R50 in profits per ha, so R50,000 in total
Which one is more efficient?
Which one is more “viable”?
Notes:
profits is NOT just cash income, but includes for instance value of own consumption
A bag of maize produced by an unemployed subsistence farmer on unused land has a one-to-one impact on the trade balance
Economies of scale Cont.: Economies of scale Cont. Economies of scale in agriculture (world wide) are limited
Current US agriculture is characterized by diseconomies of scale
But as overall incomes rise, farm sizes rise
Increase in farm size over time in the US is fully explained by income growth and subsidies
Not by economies of scale
Question:
if there were economies of scale in agriculture in South Africa, then why the sub-division restriction and the regressive land tax?
South African reality check: South African reality check Well thought-out decentralization frameworks in place
Excellent sectoral policies
But empowerment of local governments and communities is inadequate
Many programs are still financed and implemented in complex stove pipes by the central sector departments
Planning requirements, implementation modalities and fiduciary controls are strangling local capacity and driving beneficiaries crazy…
Beneficiaries are not able to access funding for their entire projects from single sources
See: South Africa - In Search Of Land and Housing in the New South Africa: The Case of Ethembalethu
Much more than land needs to be financed in land reform: land is only 30-40 percent of costs: Much more than land needs to be financed in land reform: land is only 30-40 percent of costs
Supply-driven implementation through “stovepipes” needs reform: NAFU’s “one-stop shop” idea: Supply-driven implementation through “stovepipes” needs reform: NAFU’s “one-stop shop” idea
But how?: But how? Beneficiaries needs are integrated
To be met by a single budget which disburses depending on demand and quality of proposals
One accountability mechanism
One appraisal and approval procedure
A single operational manual
As part of local government development plan
Which should constitute the “contract” between all stakeholders
Start with impact evaluation as part of implementation roll out, not afterwards…
Develop capacities via:
Training
Learning by doing
New consensus is emerging…: New consensus is emerging… Both local government and communities need to be fully empowered to play their part
By moving from consultation and facilitation to empowerment models
Allow beneficiaries to design and implement their own projects, with assistance from competent service providers
Line departments need to move from direct service provision to policy, facilitation, and monitoring and evaluation roles
Role of the private sector: Role of the private sector Existing program, the Land Redistribution for Agricultural Development (LRAD), is, on paper, very flexible and allows beneficiaries to chose their service provider
(In practice, government officials and consultants run it, but we hope that this will change)
Three ideas for direct private sector involvement:
Private sector can work with beneficiaries to purchase land and establish agricultural production (funded by the LRAD grants)
Service providers could develop a farm and make it suitable for small and/or medium-scale family farms, with beneficiaries purchasing the farms using the LRAD grants (developed model)
Commercial banks could request government to be allowed to manage the grant, if they provide loans (agency model)