Elsevier

Land Use Policy

Volume 131, August 2023, 106726
Land Use Policy

Compulsory land redistribution from the perspective of the theory of price control

https://doi.org/10.1016/j.landusepol.2023.106726Get rights and content

Highlights

  • Theory of price control applied to response of landowner to a risk of expropriation.

  • Empirical study on how agrarian reform may affect land use change in Philippines.

  • Land use conversion was partly induced by high risk of compulsory acquisition.

  • But evidence that it was a reasonable market response was also found.

  • Preference for market-led redistribution may have tempered reform-induced LUC.

Abstract

Philippine agrarian reform involves compulsory purchase of private farmlands. Several landowners were suspected of either using land use conversions (LUCs) to pre-empt expropriation, or choosing market-led agrarian reform (MLAR) options to retain effective control of their farmland. However, there has been no statistically-tested empirical evidence to support anecdotal claims that these were adopted by landowners to protect private property rights. Before testing whether LUCs have been used solely to avoid land redistribution, this article provides a theoretical framework that treats the reform as a price intervention policy since compensation is usually below market value. This article’s novelty lies in its application of Cheung’s theory of price control to explain how land redistribution could change the use of productive asset through LUC, or the contractual arrangement of involved parties through MLAR. Afterwards, this study employs feasible generalized least squares regression, where the effect of compulsory land redistribution on MLAR and LUC are tested to investigate the hypothesis that LUC was largely induced by agrarian reform. The results show that some LUC and MLAR were induced by the risk of expropriation, although in the case of former only when the risk of expropriation is high. Based on Cheung's theory of price control, the response choice should depend on the transaction costs associated with each of the alternatives. The theoretical framework suggests that some landowners may have preferred MLAR first before considering LUC, which is posited as one reason why the proportion of expropriation-induced LUC may not have been as high as some might like to claim.

Introduction

Branded by some as having the longest ongoing agrarian reform in modern history, the Philippine government promised in early 2019 to finish redistributing the remaining 600,000 ha redistribution balance by 2022. The 1988 Philippine agrarian reform, more commonly known as Comprehensive Agrarian Reform Program or CARP, aimed to redistribute farmlands and other lands at the disposal of government to landless farmers. It has several components that can be classified broadly as either private or non-private agricultural lands. Under private agricultural lands, it may be non-compulsory or compulsory, under which there are two components: compulsory acquisition and operation land transfer. The latter is a carry-over program from a 1970's agrarian reform. The focus of this article is on compulsory acquisition since it’s the one that’s still largely unfinished and is the most contentious part of the Philippine agrarian reform program. For this component, farmlands in excess of a landowner’s retention limit (in general, 5 ha plus 3 ha for each child), are supposed to be acquired compulsorily in exchange for a just compensation (usually below market value) by the government, who will then re-sell it at lower prices to farmers who own less than 3 ha of farmland. When the enabling law for this program was originally promulgated in 1988, the aim was for the Department of Agrarian Reform to redistribute 3.82 million ha by 1998. This target was later revised several times; and now, it stands at 5.43 million ha. This deadline was not met, and the program had to be extended in 1998, and again in 2009 under a new name (with a few modifications). When this second extension expired in 2014, the compulsory purchase and redistribution of private agricultural lands which had been issued a Notice of Coverage still had to be finished. For further explanations on the different components of Philippine agrarian reform, please see the reports of De Los Reyes (2016) and the World Bank (2009).

One reason for the glacial pace of redistributing private farmlands is the evasion practices of landowners, which was also common in other countries such as evicting tenants. One suspected tactic used in the Philippines is land use conversion (LUC). Under its current regulations, once a farmland ceases to be agricultural, it goes beyond the scope of agrarian reform. It took nearly three decades before the Department of Agrarian Reform—which also has certain authority in the approval of such conversions—got alarmed and proposed a two-year ban on LUC to reexamine the “rampant and unchecked conversions of prime agricultural lands” (Cabildo et al., 2017). However, this proposal was successfully stalled by dissenters. Former Secretary Mariano from the said department put the approved LUC figures at 98,939 ha by early 2017, which represents 1.82% of the 5.43 million ha overall land redistribution target. See Appendix A for some statistics on Philippine agrarian reform. Surprisingly, after a couple of years, the department has even speeded up the process of LUC approvals (Chavez, 2019).

Another way out for landowners is to use the so-called voluntary land transfer, whereby the land transfer (including farm location, size, price and so on) can be privately negotiated by landowners and peasants with the government facilitating the bargaining process. This is one of the non-compulsory components of the Philippine agrarian reform. This is also the market-led agrarian reform (MLAR) or the willing-buyer-willing-seller formula built in to the Philippine agrarian reform law and even enshrined in its Constitution. In principle, the law states that such MLAR arrangements must be more favorable to the farmer than what the government could have otherwise offered them if the farmland were redistributed compulsorily. However, landowners used MLAR to circumvent the law because they can thereby retain de facto control over the property even though they have relinquished de jure ownership (cf. Borras Jr... and Saturnino M, 2007; de los Reyes, 2016).

The economic literature on agrarian reform usually focuses on whether smaller farms are more productive. Those that use property rights perspective to scrutinize agrarian reform, usually pay more attention to whether secure property rights can enhance efficiency or provide greater access to credit. Many of them look at tenancy reforms. This paper aims to understand a landowner’s response to a risk of expropriation or compulsory land redistibution. One such response is premature land use conversion. However, the literature on land use change usually discusses environmental, economic, social and political factors; and rarely look into contributory institutional factors. There has been no prior statistical testing on how much land use change may have been accelerated by agrarian reform. In the Philippines, only a sociopolitical analysis using anecdotal evidence has been done. A brief review of studies on agrarian reform and land use change is presented in Section 2.

Property rights economics contributes to the understanding of how LUC and MLAR may be induced by compulsory land redistribution. Land redistribution can be seen as a form of compulsory purchase, where the below-market-value compensation has the effect of a price intervention policy. Applying Cheung’s theory of price control (1974, 1975), the attenuation of property rights due to compulsory redistribution may have led to premature applications for farmland conversion through LUC, and also to more alternative landowner-farmer relationship in the form of an MLAR agreement. This is the first hypothesis to be tested in this study. Furthermore, his theory also held that a landowner’s response (in this case, the choice between LUC or MLAR) will depend on the transaction costs of each alternative. This is the second hypothesis. How Cheung’s theory of price control can be applied to agrarian reform will be explained in Section 3. Then, Section 4 will explain how the study’s empirical design tests those two hypotheses. The results and discussion in Section 5 will relate the empirical results back to the theoretical framework. The last section will recapitulate and provide some concluding remarks.

Section snippets

land redistribution and property rights

Asset redistributions are by nature property rights redistributions. Using a neo-institutional perspective, Raul Fabella, 2003, Fabella, 2014 has criticized the program with the main argument that it distorts the land market. The law prohibits the sale of awarded farmlands within 10 years, and even conveyance of usufruct that aims to circumvent the law. Apart from preventing reallocation of resources towards more efficient use, this proscription also affects the collateral value of the

Theory of price control applied to compulsory purchase

Cheung (1974) explains how the “disequilibrium effects” of price controls, while temporarily manifesting in shortages, will disappear once a new criterion of allocation is used. In order to generalize the possible outcomes of disequilibrium, he offers two propositions.

His first theoretical proposition states, “When the right to receive income is partly or fully taken away from a contracting party, the diverted income will tend to dissipate unless the right to it is exclusively assigned to

Empirical design

The best way to test the hypotheses would be to get a time-series farm-level data of land subject to redistribution that were subsequently converted. But not even the government agency, which is in charge of both redistribution and approving LUC, has such a matching. Even if they had, it would not suffice for our purposes since we are also interested in controlling for other factors that may have induced a landowner to apply for LUC. In that case, there would also be a need to track subsequent

Results and Discussion

The main results of estimating MLARt (Eq. 6) are presented in Table 2, where N = 1026 (n = 38; t = 27). Model 1 assumes that CLR has no asymmetric effect; Model 2 assumes otherwise (i.e., there is a difference between CLR_pos and CLR_neg).

All of the regressors are statistically significant and follow their expected signs, except for Low_Ginit2. CLRt1 is significantly positive and doesn’t have asymmetric signs, although CLR_negt1 has a higher positive impact than CLR_post1. AgriHHt1 and

Concluding remarks

This article explored whether and to what extent compulsory land redistribution (CLR), acting as a price intervention policy, may have induced landowners to change asset use (i.e., land use conversions, LUC), or change their contractual arrangements with tenants (in this case, through market-led agrarian reform, MLAR, otherwise known as willing-buyer-willing-seller). The theory of price control advanced by Cheung was applied mutatis mutandis as the theoretical framework to investigate this

CRediT authorship contribution statement

Dy Kenneth Bicol: Conceptualization, Data curation, Formal analysis, Investigation, Methodology, Validation, Writing – original draft, Writing – review & editing. Chau Kwong Wing: Conceptualization, Formal analysis, Investigation, Methodology, Supervision, Writing – review & editing.

Declaration of Competing Interest

Nothing to declare.

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