Wednesday, February 5, 2014

Why Ethiopia Needs to Privatize Land

By Daniel Tefera (PhD)

One of the factors, essential for economic development, is a successful and thorough transformation of subsistence agriculture into commercial farming. This is not just a technical transformation. It is also a social transformation. It requires changing existing property relation through land reform that can privatize land and create owner farmers who will produce for market.

In the eighteenth century, United Kingdom achieved agricultural breakthrough by breaking up communal land into private farms so that major technical and biological advances could be introduced into agriculture. Private ownership of land allowed enterprising individuals more scope and opportunities for permanent farming and independent experiments. Land began to be used more efficiently; by rotating crops, all the fields could be cultivated, rather than some land lying fallow as had been the practice for several centuries.

In the 1870s, the Dutch were the first to lead in productivity, with the British and Americans soon catching up, because many Dutch farmers owned their land, the feudal nobility was small and weak, and the potential power was in the hands of entrepreneurs. There was greater freedom to produce and sell agricultural products and manufactured goods. Firms could ship their products to markets and hire workers without political restrictions.

The United States of America showed a remarkable increase in agricultural productivity thanks in part to the Homestead Act of 1862, which created numerous privately owned family-farm units from large landed estates and reserves of unused land. The government made land purchase feasible by making credit sources available. The Homestead Act of 1862 was a strong democratizing measure.

Realizing that improved agriculture lay at the foundation of a strong nation, Japan carried out a land reform that abolished landlordism and created owner farmers. Under Japan’s 1946 land reform, wealthy landlords were given a reasonable price to sell their land to the government. The government then sold the land on credit to the peasants at the same price, giving the priority to tenants who had been farming the land. The peasants were given sufficient time to pay their mortgage and no interest was charged. The American Occupation at the time was helpful for the success of the reform. The Occupation used its power to enforce a law, which was against the interest of wealthy and powerful landlords.

The Japanese land reform was later emulated in Southeast Asia, especially in South Korea and Taiwan. In South Korea’s tenant-purchase program, the price of each plot was set at three times its average annual yield. The farmer was given up to fifteen years to pay and no interest was charged. The farmers embraced the program because they believed that paying for the land would make their ownership more secure.

There have been land reforms in Ethiopian history, but they have always been done for a political purpose to consolidate power of the rulers. Land reform was considered, for the first time, a necessary factor for agricultural transformation and economic development in Ethiopia only after the 1960 Coup.

In 1961, a separate ministry of land reform was created to study the various land tenure systems of the country. But nothing was implemented because of the formidable opposition by the powerful land-owning class of the royal family, the nobility, the Orthodox Church and high ranking officials.

In 1975, the Stalinist Regime of Mengistu Hailemariam abolished private ownership of land and commercial farms without compensation, making the state the sole proprietor of all land. Peasants were allowed use right only, living as tenants of the state. By controlling all land and keeping it out of the free market, the state prohibited the gainful use of landed property. Worse still, in 1991, the Regime of Meles Zenawi introduced a lease system instead of returning land over to the peasantry.

State ownership of land did not produce a property relationship that is significantly different from the imperial system. The state replaced the land-owning class. Peasants still worked the land they didn’t own, lacking the security and pride of an owner.

A genuine land reform that can end state monopoly and privatize land is long overdue in Ethiopia. However, there has to be first a permanent consensus on the rationale for a genuine land reform that can create private ownership, enforced by law.

There may be those who believe that land privatization will bring back the old disparity in land ownership. Others may say that the peasants will sell their land and move en masse to urban centers to look for jobs, thereby increasing the number of the unemployed. Still others may argue that foreign capitalists will buy all the land, impoverish the people further and threaten the country’s sovereignty. Some may even believe that land reform is a non-issue, arguing that China is growing rapidly without it.

Peasants in Ethiopia were opposed to disparity, but not to privatization. Historically, they depended on their holdings as a source of economic security, political power and social justice. Therefore, they had always favored the idea of equal distribution of land and getting their private holdings registered under their names in government tax books. During the reign of Mengistu Hailemariam, peasants preferred private farms to collectivization.

The argument that privatization will encourage the peasants to sell their holdings and flee to the urban centers is based on a false assumption that peasants are irrational people. A recent study by Abeje Berhanu and Ezana Amdework about peasant entrepreneurship debunks this mythology.

The study affirms that in Ethiopia entrepreneurship is a widespread phenomenon among the peasantry, “characterized by a strong orientation to improvement and change, creativity and innovation, new ways of generating income and making profit, pro-activeness and willingness to take risk, far-sightedness and forward planning.”

Peasant entrepreneurship is essential for consolidating farm sizes and improving productivity. In Ethiopia, because of population pressure in the rural areas, plot sizes have continuously diminished and become uneconomical to farm. The average size of a cultivated holding is less than one hectare per peasant household.

The argument that privatization of land will flood Ethiopia with foreign investors is based on an irrational fear and hatred of the free market system. Investment capital is a scarce resource; and consequently, it moves mainly to places of high return and safety, such as the United States of America or South Africa. The Ethiopian market is not one of these places. In the United States of America, foreigners buy real and financial assets and the inflow of funds has benefited the American economy.

How about the argument that land reform is a non-issue for Ethiopia given the Chinese experience? This is just another excuse to postpone the necessary reform. Land is actually owned by the state in China. The so-called “collective ownership of rural land” by the people is an empty promise. The Chinese peasants do not own the land; they cannot sell or mortgage their holdings. On the other hand, the government can expropriate land from the peasants and lease it out to generate revenue.

All this justifies the urgent need for a land reform that can create private ownership in Ethiopia. Land privatization will enable peasants to own (through an affordable land-purchase program) the land they work and have the security and pride of an owner. They will have an incentive to work harder, improve their incomes and be able to save and invest in agricultural improvements. As a wise observer once said, “Give a man the secure possession of a bleak rock, and he will turn it into a garden; give him a nine year lease of a garden and he will convert it into a desert.”

Private ownership of land will compel herders in Ethiopia to show interest in scientific stock breeding and range management practices. The communal range land system has kept the herding communities in Ethiopia in poverty by depriving them of the initiative to be resource-conscious and devise efficient ways of raising cattle. Herders in Ethiopia consider natural resources as free and limitless. As a result, they seek to increase their livestock beyond the carrying capacity of their surroundings. This practice presses harder on the food-feed supply while adding relatively little to consumable meat supplies or productive work-animal capacity.

Private ownership of land will encourage both domestic and foreign entrepreneurs to invest in agriculture. Prior to 1975, there were many successful commercial farms and plantations in Ethiopia, which were owned by domestic and foreign entrepreneurs. They grew industrial crops and food staples. Productivity per acre of commercial farms was more than five times higher than that of peasant farms. The commercial farms and plantations helped increase the supply of grains and raw materials and enabled the country to be self-sufficient in sugar and cotton production in a short period of time. They provided employment opportunity and contributed to state revenue and foreign exchange earnings. They brought modern technology to the countryside.

Private ownership of land in Ethiopia has to be enforced by law and the private farms and agribusinesses that were confiscated by the state have to be returned to their previous owners or a fair compensation has to be paid. Urban land has to be privatized. Private homes and plots that were confiscated by the state have to be returned to their original owners or a fair compensation has to be paid. This will restore faith in the new system and reassure potential investors.

Government has to get out of the real estate industry and a free market for urban land and housing has to be restored. This will help economize housing and provide potential investors an incentive to increase supply. Instead of a low-rent accommodation policy, government can subsidize home purchases by the low income. This will promote capital accumulation and widen the middle class.

The now industrialized countries transformed their economies in a fundamental way by changing their property relationship and uplifting their peasants first. By freeing land and their peasants, they laid the foundation for a democratic, middle class society. Thus, the question of freedom and democratic development in Ethiopia cannot be resolved without implementing a land reform that can end state monopoly and transfer land into private hands.
The writer, Daniel Teferra, is Professor of Economics, Emeritus