Land Rental Markets in the Process of Structural Transformation: Productivity and Equity Impacts in China

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Land Rental Markets in the Process of Structural
Transformation Productivity and Equity Impacts
in China

• Songqing Jin and Klaus Deininger
• World Bank

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Outline

• Background
• Key Questions
• Conceptual Framework Hypotheses
• Data and Methodology
• Main Results
• Conclusions

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Motivation

• Past studies have focused on the efficiency
  nature of alternative rental contracts taking the
  decision to rent as given, often under the
  environment of multiple market imperfections and
  (at least implicitly) an unequal ownership
  distribution of land.
• With economic environment changes (i.e., rural
  non-farm opportunities), there is increasing
  potential for efficiency-enhancing rental even in
  a rural economy with equal land distribution. (In
  china, share of migrants 5 in 1988, 10 in 1998,
  17 in 2000 - 124.6 million internal migrants).
• Productivity impact was not well measured in the
  past studies mainly due to data availability.
  Data from both parties of rental transaction
  allow us to explicitly measure such impacts.

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Key Questions

• How do non-farm employment opportunities affect
  rental markets?
• Do land rental markets help reduce poverty and
  increase productivity?
• Does the current rental markets realize their
  full potential?
• What are the key factors prevent rental markets
  from performing at their full potential?

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Model Setup

• Household is endowed with fixed amount of labor (
  ) and land ( ), and an exogenous level of
  agricultural ability (?i)
• Household divide its own labor endowment between
  farm work and off-farm wage employment
• No farm labor market, renting of land incurs
  transaction costs
• 3 sources of income agricultural production,
  wage income and rental income.
• Households maximize total income by optimizing
  labor allocation and choosing optimal operated
  land size through land rental markets

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Conceptual framework
FOC
For tenants
For Landlord
For Autarkic household
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Propositions

• Rental markets transfer land to land-poor but
  efficient producers.
• Increase in transaction cost will expand the
  autarky range, thus reducing the number of
  producers participating in rental markets.
• Increases of off-farm employment wage will
  increase total rental supply and lower
  equilibrium rental rate.

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Innovations in estimation

• Analytically, we use data collected from both
  parties to test the predicted impacts of rental
  markets
• Econometrically, we use an ordered probit model
  (OPM) to test the propositions derived from the
  model
• Agricultural ability is explicitly included in
  regression
• Transaction costs enter into threshold equations

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Data sources

• A sub-sample of NBS regular consumption survey
• 8000 panel households, 800 villages, 9 provinces,
  2002 to 2004
• Detailed info on demography, assets, income,
  expenditure, agricultural production and rental
  participation.
• A follow up survey administered to those who were
  actually involved in land transactions
• detailed info. on contract arrangement, net
  revenue obtained from the land before/after
  transfer, occupation status and income level for
  both parties involved.
• A 2003 Village Survey
• Migration, Village income, land endowment, share
  of households with land certificate, land policy
  arrangements such as land use regulation and
  restrictions.

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Descriptive Evidence

• Rapid emergence of rental markets
• 13 (10) rented in (out), with great variation
  across regions
• Migration most active in centre and SW where
  rental markets tend to be most active as well
• Explicit and implicit rental restrictions still
  in place

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Characteristics by rental status?

• More land less labor rent out, less land and more
  labor rent in
• Poor (income/asset) rent in, rich rent out
• More productive households rent in
• higher share of income from non-farm (i.e.,
  higher in all categories of migration, local
  wages and self-employment) rent out

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Analytical results productivity and structure
impact

• Significant improvement in productivity (figures
  from tenants and landlords are surprisingly
  consistent)
• Gain 267 and 283 Y/mu, accounting for gt80 net
  revenue increase, and 55 gain after overall
  productivity gain are controlled for, 2/3 of
  total gains to tenants and 1/3 to landlords
• Rental markets bring about considerable
  occupation shift
• Vast majority of landlords (57) derived main
  income from agri, followed by local non-farm
  (23) and migration (20) before renting out
• only 17 relied on agriculture for main source of
  income, 55 derived main income from migration
  and 29 from local non-farm after renting out

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Analytical results welfare impact

• Significant welfare improvement to both parties
• 45 of landlords moved up their income level by
  at least one category, 54 remained in the same
  category and only 1 moved down. Share of
  households in the bottom income group dropped by
  20 percentage points from 30 to 10 after
  renting out.
• Although 2/3 of tenants remained in the same
  income category, 1/3 moved up and only 1 moved
  down. The share in the poorest group declined
  from 21 to 10

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Analytical Results Remaining Constraints

• 40 demand-constrained, and 12 wanted to supply
  more in the past
• 45 (or 23) not confident about renting in (out)
  desired amount of land in the future though 80
  perceived passage of RLCL made transfer easier
• 40 (31) rented in from (out to) relatives, 60
  of transactions have contract, only 10 written,
  about a quarter with fixed term
• Net gain from renting to non-relatives is almost
  80 higher than renting to relatives.

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Econometric Results

• Rental markets tend to transfer land from land
  abundant and labor poor households to those with
  little land and large amounts of labor
• Poor and more efficient households received land
  through rental markets
• Off-farm opportunities increase supply of land
• Migration encourage rental market participation,
  rental restrictions reduce participating in
  renting out, but not renting in
• Possession of land certificate increase rental
  participation

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Conclusions and Policy Implications

• Rental markets increase productivity and tenants
  welfare by 60 and about 25, and even larger
  increases in landlords income
• The potential for rental markets to contribute to
  the rural economy is very significant in the
  situation of rapid structural changes, even in
  the environment with very equal land endowment
• Although reform has helped increase tenure
  security and improved the functioning of rental
  markets, tenure insecurity issue remains