Student - December 6, 2007

Land rights are more help to big farmers

Land ownership rights can contribute to economic prosperity in rural Peru. Farmers who own land are more likely to make investments to improve the value of their property. But one theoretical expectation does not hold up: farmers with land titles do not get a bank loan more easily.

The assumption behind the liberalisation of agricultural policy in many developing countries is that individual ownership of land is good for the economy. The theory is that farmers with formal land ownership rights can borrow money more easily and will invest more in the quality of that land. However, there is little empirical evidence to back up this theory.

Development economist Ricardo Fort did PhD research on the relationship between land ownership and economic performance among farmers in Peru. His research results show that farmers are indeed more likely to invest in their land if they own it. If farmers know for certain that they are going to be able to use the land in the long term they are more likely to invest, for example in irrigation or other activities that increase the value of the land.

But the other assumption, that farmers with legal land property rights can get a loan from a bank more easily, does not hold. Land rights are not a sufficient guarantee for a bank, states Fort, especially where the plot size is small. In this case it costs the bank more money to sell the land than the price it gets. For farmers with more land, ownership of that land is enough guarantee to be able to obtain a loan. But other factors also play a role. If a large proportion of the land in an area is privately owned it is easier to buy and sell land there. A higher density of ownership rights in an area is therefore a reason for a bank to be more inclined to extend a loan, Fort discovered. What also helps is offering insurance, for example against death of livestock or against drought. Many small farmers do not want to take out a loan because they prefer not to run the risk that they cannot pay it back. Government programmes aimed at increasing land ownership are therefore only likely to work if other measures are also taken, Fort concludes. / Joris Tielens

Ricardo Fort received his PhD on 29 November. He was supervised by Professor Arie Kuyvenhoven, chair of Development Economics at Wageningen University and Professor Ruerd Ruben, chair of Development Studies at the Radboud University Nijmegen.