|Oct 2006, Martin Ravallion and Dominique van de Walle
No economist can fail to be struck by the size and potential welfare significance of the reforms that are required to transform a control economy into a market economy. The policy reforms called for bring both opportunities and risks to the living standards of a country’s citizens. In poor economies, the initial focus of reform efforts is naturally the rural sector, which is where one finds the bulk of the population and almost all the poor. Economic development will typically entail that many rural households move out of farming into more remunerative (urban and rural) non-farm activities. Reforms that shift the rural economy from relatively rigid administrative allocations of farmland to more flexible market-based allocations can thus play an important role in the process of economic growth.
Vietnam has probably gone further than any other developing economy in implementing such market-based agrarian reforms. Vietnam’s agrarian reforms have followed closely the two steps of the standard policy prescription for transforming a socialist command economy into a market economy: first one privatizes productive assets and then one undertakes legal reforms to permit free transactions in those assets. The first step entailed breaking up the collectives (whereby land had been farmed by organized brigades) and assigning the land to individual households by administrative means. The second stage introduced land titles and allowed the use rights over land to be legally transferred and exchanged, mortgaged and inherited.
Policy Research Working Paper 2951assesses whether Vietnam’s efforts to introduce a free market in land-use rights has helped foster a more efficient allocation of land, and hence help reduce poverty. The paper finds evidence that — after the legal reforms to introduce a market in land-use rights — land was re-allocated in a way that attenuated the initial inefficiencies of the administrative assignment of land at the time of de-collectivization. Households who started with an inefficiently low (high) amount of crop land under the administrative assignment tended to increase (decrease) their holdings over time. The adjustment was not rapid, however; in the aggregate, only one third of the initial proportionate gap between the actual allocation and the efficient allocation was eliminated within five years. The following graph gives the proportionate changes (log differences) in land allocation over five years (across the sample of 2,500 farm households), which is plotted against the authors’ measure of each household’s initial land deficit relative to the most efficient allocation at the beginning of that period. It can be seen that land reallocation tended to respond positively to the initial inefficiency in the administrative allocation; the line of best fit has a slope of one third.
The market mechanism worked more rapidly for some types of households than others. At a given land deficit or surplus relative to the efficient allocation, households who started with the least crop land under the administrative assignment tended to see the largest increase in holdings during the transition. In other words, the transition process favored the “land-poor.” The speed of market adjustment was also affected by location and demographic shocks, and the new market-driven process favored households with long-term roots in the community, with male heads, better education and with more non-allocated land. The authors find that these factors were generally cooperant with competitive forces, in that they were jointly positively correlated with land reallocation and the initial land deficits relative to the efficient allocation.
The paper’s results are not consistent with the view that strong non-competitive forces in the local political-economy worked against efficient land reallocation. However, the findings suggest that the speed of land market adjustment can be slow, possibly reflecting other market imperfections, such as for credit.