Redistribution, investment, and human capital accumulation: The case of agrarian reform in the Philippines

Redistribution, investment, and human capital accumulation: The case of Agrarian Reform in the Philippines Klaus Deininger Pedro Olinto Miet Maertens1 1World Bank, Washington DC; Department of Agrarian Reform, Manila; KU Leuven. We thank Agnes Quisumbing and Kei Otsuka for kindly giving us access to their data and Alain de Janvry, Elisabeth Sadoulet, Karen Macours, and participants at the GDN workshop in Bonn for helpful comments. Funding from the Swiss Special Studies Trust Fund is gratefully acknowledged. The findings and views of this paper are our own and do not necessarily reflect those of the World Bank, its Executive Directors, or the countries they represent.  Redistribution, investment, and human capital accumulation: The case of Agrarian Reform in the Philippines Abstract: We examine whether there is empirical support at the household level for theoretical models that suggest that redistribution of productive assets can enhance opportunity and overall growth. To do so, we use a long panel data set for beneficiaries and non-beneficiaries from land reform in the Philippines. Results indicate that land reform resulted in higher investment in physical capital, a greater increase in the intergenerational transmission of human capital, and greater household welfare and productivity. The impact of obtaining land was several orders of magnitude higher than that of education and, if anything, negatively related to initial endowments. This positive impact notwithstanding, we find that the way in which land reform was implemented has reduced access to land for the landless and led to a worsening of the functioning of land rental markets. A strategy that would replace administrative mechanisms (land ownership ceilings) with economic incentives (land tax) could be associated with gains in efficiency and equity. 1 Introduction: Redistributive policies and land reform An increasingly influential theoretical literature suggests that, contrary to earlier beliefs, redistribution can be good for growth. However, up to date there exists little empirical evidence to support, let alone quantify, such an "opportunity-enhancing effect of redistribution", especially in developing countries. In this paper we use the example of land reform in the Philippines to assess the impact of a one-time asset transfer on households'investment and intergenerational transmission of human capital. Availability of data spanning a 30 year period enables us to make inferences on the impact of redistribution on investment and long-term asset accumulation. We find not only that there are important long-term effects but also that these are likely to outweigh static productivity impacts, providing support to the hypothesis that redistribution of productive assets can help increase growth. At the same time, we find that the way in which such redistribution was accomplished may actually have limited its outreach and impact. For the concrete case at hand we use this to make recommendations on how a more inclusive, effective, and above all speedy program could be implemented. 1.1 Asset ownership and growth Whether redistribution and the associated focus on equity of opportunity are conducive or harmful to a growth-oriented strategy has been a key concern in development economics. Traditionally, in a literature that was motivated by empirical observation and aiming to discover and explain regularities in the data, 2  there was consensus that growth would require high and/or increasing inequality; a notion often associated with the famous hypothesis by Kuznets (1955).2 This was contested by scholars emphasizing the importance of "growth with equity" and of redistribution as a basis for subsequent growth (Adelman 1995). More recently, the distribution-growth relationship has been re-discovered by economic theorists who noted that, in the presence of capital market imperfections, a one-time lump sum redistribution may be associated with a long-term increase in levels of growth (Aghion et al. 1999). Possible reasons for a more equitable distribution of assets and the associated economic opportunities to be associated with higher levels of aggregate growth are the presence of externalities and moral hazard (Bardhan et al. 1999; Aghion and Bolton 1997; Banerjee and Newman 1993), indivisible discrete investments in items such as schooling that can not be used as collateral (Galor and Zeira 1993), and segregation of economic agents according to wealth with local public goods affecting future growth (Benabou 1996). Although these theoretical advances have generated significant interest, most of the empirical literature thus far has focused on describing the relationship between levels of distribution and growth, rather than the impact of redistributive measures. At the aggregate cross-country level, a negative relationship between the distribution of assets and subsequent growth appears to emerge (Birdsall and Londono 1998; Deininger and Squire 1998). Differences in initial income distribution has been argued to generate significantly different development trajectories, for example, in Britain and France (Piketty 1997) and are related to broader socio-economic phenomena such as crime (Fajnzylber et al. 1998) and issues of political economy (Binswanger and Deininger 1997).3 At the micro level, initial wealth and the ensuing borrowing constraints have been shown to be a determinant of households'ability to make productive investments, acquire human capital, and start up enterprises (Blanchflower and Oswald 1998). In developing countries, a relationship between asset endowments and productivity has been postulated in the "efficiency wage" hypothesis (Dasgupta and Raj 1986 and 19987). Although far from conclusive, there is growing evidence for the presence of "poverty traps" (Fafchamps and Pender 1997; Jalan and Ravallion 1999), i.e. situations in which poverty is perpetuated not because of lack of ability but because economic agents lack endowments. Although the theoretical literature predicts that transfers of (productive) assets could be one way to get out of poverty traps (Putterman et al. 1998; Hoff, 1996; Kanbur and Lustig 1999), there is little evidence on whether redistributive programs that advance equity and improve efficiency exist and can be implemented in the real world. This would be of relevance from a policy perspective and to provide 2The three main reasons for higher inequality to be associated with higher growth are if (i) the marginal propensity to save for the rich is higher than it is for the poor according to the Kaldorian model; (ii) investments are indivisible (e.g. steam power) and capital markets non-existent; and (iii) there is moral hazard with unobservable effort supply. 3  insight on a number of issues (e.g. whether one-time redistribution can have permanent effects) on which different theoretical models provide different predictions. However, to make empirical statements on this issue, information on an actual asset transfer is necessary. In this paper we use the case of land reform in the Philippines. We examine the impact of this intervention on beneficiaries and also ask to what degree the policy pursued to make this feasible might have had undesirable side-effects. 1.2 Land reform in international perspective Land reform has traditionally been viewed as an ideal redistributive policy. One reason is that, in view of the immovability and indestructibility of land, land reform may provide a basis for a non-distortionary lump-sum redistribution (e.g. Banerjee 1999). A second reason is that a large and influential literature on the presence of an inverse farm-size productivity relationship (e.g. Berry and Cline 1979) predicts that land reform can serve as a mechanism to increase not only equity but also the efficiency of resource use in the rural sector. Finally, in a number of countries, legal discrimination has prevented access to land by the poor, implying that policies to redistribute land