SACOB Land Reform in South Africa

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Information about SACOB Land Reform in South Africa
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Published on November 26, 2007

Author: Herminia

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Land Reform in South Africa: Selected Issues:  Land Reform in South Africa: Selected Issues Rogier van den Brink Country Economist, South Africa The World Bank Presentation to SACOB Conference Johannesburg October 11, 2007 Outline:  Outline The role of agriculture in growth and poverty reduction How agriculture is organized matters a lot South Africa’s potential for land and agricultural reform Why is it going so slow? Some ideas about the role of the private sector The role of agriculture in growth and poverty reduction:  The role of agriculture in growth and poverty reduction Poverty reduction: international trends:  Poverty reduction: international trends Global decline in the incidence of poverty (US$1/day): 28 percent in 1993 to 23 percent in 2002 Caused entirely by rural poverty reduction, while urban poverty has increased More than 80 percent of the decline in rural poverty was due to improved conditions in rural areas Migration is not the main instrument for rural, national and global poverty reduction Improved rural conditions are, with agriculture as the main source of growth Source: draft World Development Report on Agriculture 2008 India’s experience with poverty reduction:  India’s experience with poverty reduction Effect of Urban Growth Urban growth reduced urban poverty ... but had adverse distributional effect within the urban sector ... there was no positive spillover of urban growth on rural poverty Effect of Rural Growth Rural growth was distributionally neutral in the rural sector It sizably reduced rural poverty Rural growth also had pro-poor distributional effects on urban poverty This reinforced the importance of rural growth for national poverty reduction Poverty responds more to rural economic growth than to urban economic growth Source: Several papers by Martin Ravallion and Gaurav Datt, using time series of consumption data from 35 National Sample Surveys spanning 1951-94. This is one of the longest series of national household surveys existing in the world today suitable for tracking living conditions of the poor. China and Latin America:  China and Latin America Similar story for China (1980-2001): 75-80 percent on national poverty reduction was due to rural poverty reduction (with the rest due to migration) Source: Ravallion and Chen (2007) Growth in agriculture is more effective in reducing poverty than non-agricultural growth: For China (a transforming country), agriculture was 3.5 times more effective For Latin America (an urbanized region), the ratio was 2.7 Source: draft WDR 2008, Valdes and Foster (2005) Different role for agriculture across countries:  Different role for agriculture across countries Agriculture-based countries: most of Sub-Saharan Africa agriculture to drive growth and mass poverty reduction Transforming countries: most of Asia, Middle East and North Africa, parts of Europe and Central Asia agriculture to reduce poverty and confront rising rural-urban income disparities Urbanized countries: most of Latin America and parts of Europe and Central Asia to reduce remaining rural poverty but even where share of agriculture in GDP is small (like in Brazil and Chile): Agriculture has been the fastest growing sector for over a decade Providing major investment opportunities for commercial enterprises and large numbers of smallholders How does agriculture reduce poverty?:  How does agriculture reduce poverty? By raising agricultural profits and labor income By raising non-farm profits and labor income: via multipliers, see next slide By causing lower prices of non-tradable foods: Consumption basket of the poor gets cheaper Also leads to lower real wages in other sectors, which then grow faster And, subsequently, under tightening labor markets and higher unskilled wages, economy-wide: the agricultural minimum wage effectively sets the minimum wage for the entire economy Sources: Johnston and Mellor (1961) Delgado and Alfano (1994) Draft WDR 2008 Agriculture has large multiplier effects:  Agriculture has large multiplier effects Large forward and backward production, and consumer demand linkages: Agricultural growth multipliers generally vary from around 1.5 to 2.0 Consumption linkages being generally larger than production linkages Agricultural growth multipliers 3 times as large as those for non-agricultural growth: Lower rural-urban migration Sources: Delgado et al. (1998) Block and Timmer (1994) But what about agriculture in South Africa? Slide10:  Agriculture Source: South African agricultural sector review – Evaluation of changes since 1994, J.A. Groenewald – Department of Agriculture Labour multiplier for Selected Sectors Wood & wood products Gold mining Furniture Clothing Food manufacturing Building construction Civil engineering Textiles Trade Beverages Transport Tobacco products Agriculture labour multiplier International panel of experts (the “Harvard group”):  International panel of experts (the “Harvard group”) Ricardo Hausmann and Bailey Klinger, 2006. “South Africa’s Export Predicament.” CID Working Paper No. 129. 50 years of abysmal export performance: Today, South Africa’s exports per capita are barely higher than in 1960. South Africa’s status as a natural resource exporter does not explain this poor performance similar countries have all performed much better in terms of volume, value and sophistication Which sectors are most suited to absorb the large pool of unskilled labor? agriculture (rather than clothing and textiles) Which sectors have the highest strategic value? agriculture, machinery and equipment, pharmaceuticals and other chemicals Authors sound a wake up call for the yet unexploited potential of a more ambitious strategy in agriculture “…there are plenty of countries that either generate much more output for the same amount of employment per hectare, or much more employment for the same amount of value added per worker.” http://www.cid.harvard.edu/cidwp/pdf/129.pdf How agriculture is organized matters a lot :  How agriculture is organized matters a lot Three aspects relevant for South Africa: Farm size distribution Production (family farms, large-scale farms, or collectives) Location (the geography of apartheid) I. Farm size distribution:  I. Farm size distribution Countries with more equal land distribution grow faster, permanently:  Countries with more equal land distribution grow faster, permanently Slide15:  Country comparisons Source: Deininger (2004), also see work by Acemoglu and Robinson II. Production: family farms, large-scale farms, or collectives?:  II. Production: family farms, large-scale farms, or collectives? Family farms:  Family farms Family farms with little hired labor benefit from the superior incentives of family members to work hard, save, and invest: This often makes them efficient Family farms are at a disadvantage in access to markets, credit, technology The disadvantages rarely offset the advantages from better incentives Appropriate support system are needed to compensate for disadvantages Sources: Large body of literature, but see for instance Berry and Cline, Stiglitz, Hazell, etc. Collectives:  Collectives Production cooperatives/collective farms have failed all around the world The reasons are conflicts over incentives to work, consume income, and share profits The variant of labor-managed farms have also done poorly Cooperative production projects are also often supply-driven and fail because of lack of markets Abandoned most everywhere, except South Africa… Not just promoted by government, but also by the private sector! Individual enterprises do best But service cooperatives can do well in well in provision of inputs, marketing, finance, and other facilitating role Note: common property regimes can also function well Source: Deininger, Klaus. 1995. “Collective Agricultural Production: A Solution for Transition Economies?” World Development, Vol. 23, No. 8, pp. 1317-1334. Large-scale farms:  Large-scale farms Supervision cost of hired labor high, which makes large-scale farms relying on hired labor often inefficient Variability of land and weather lead to high management and supervision costs Large farms often produce high yields on their cropland, but leave a lot of arable land fallow or under pasture Empirical evidence: a century of research found few economies of scale in farm production Economies of scale exist only where farm production must be tightly coordinated with processing or marketing: e.g. sugarcane and bananas Contract farming provides an alternative Then why are there so many countries with very large farms?:  Then why are there so many countries with very large farms? Reduce land available to peasants By allocating titles to “unoccupied” land Differential taxation on free peasants Head, hut or poll taxes in cash or in kind, labor Restricting market access Prohibitions, monopoly marketing, concession Confining infrastructure and services to the farms of the rulers, and/or subsidizing them Source: Binswanger H, Deininger K & Feder G (1995) Power, Distortions, Revolt and Reform in Agricultural Land Relations. In J Behrman & TN Srinivasan (eds) Handbook of Development Economics, Vol. 3B. Amsterdam: Elsevier III. Location: the Geography of Apartheid:  III. Location: the Geography of Apartheid Urban Geography of Apartheid:  Urban Geography of Apartheid Rural Geography of Apartheid:  Rural Geography of Apartheid Economic and social costs:  Economic and social costs Long distance between job and residence results in very high expenditures on transportation by the poor Split families: adult job-seekers live in urban townships, while grandparents and children live in communal areas May encourage HIV/AIDS and crime Highest population densities on most fragile lands leads to land degradation Lack of access to high and medium potential arable land by small farmers—currently unused or under-used High potential arable land is often under forest plantations which have negative effects on water table or soil fertility (e.g. eucalyptus, pine trees) Forests on arable, non-erosion prone land, and too far down the watershed to protect upper reaches No peri-urban agriculture South Africa’s potential for land and agricultural reform:  South Africa’s potential for land and agricultural reform South Africa’s potential for land reform:  South Africa’s potential for land reform Substantial amount of under-used land exists in commercial farm sector Target is 30% of the land redistributed by 2014. About 83% of agricultural land is held by 50,000 white farmers But only 4% redistributed since 1994… Meeting the target would cost: Around R35 billion or US$5.8 billion Create 600,000 net full-time farm jobs at about R60,000 per job South Africa’s unemployment rate is around 25%; 40% if you include discouraged job seekers No other sector can create quality jobs at such a low cost While unresolved land issues will lead to instability… Source: costing updated from Van den Brink, De Klerk and Binswanger in Van Zyl, Binswanger and Kirsten (1996): “Agricultural Land Reform in South Africa: Policies, Markets and Mechanisms.” Cape Town: Oxford University Press. The employment potential of agriculture has not been realized:  The employment potential of agriculture has not been realized Until recently, agriculture and rural development have not figured as priorities Employment potential of family and part time farming have not been recognized Since 1994, there has been a huge loss of jobs in commercial agriculture Expelled workers have rarely been accommodated in the land reform program Support systems for family farms are poorly developed Housing and land reform are not yet rearranging the geography of apartheid:  Housing and land reform are not yet rearranging the geography of apartheid Housing is often being developed far from jobs Informal settlements near jobs are not upgraded fast enough The land redistribution programs are not progressing fast enough Part time farming near urban centers and in communal areas is not being promoted While key apartheid legislation is still in place (1975 Township Planning Act, 1936 regressive land taxation, 1970 Sub-division Act)…. Why is it going so slow?:  Why is it going so slow? Land markets need help:  Land markets need help The price of land in the market reflects: Income stream from agriculture Plus value as asset, hedge against inflation Farmers can typically only afford to pay the agricultural value So will be outbid in the land market by the rich Need to remove all distortions favoring large farmers Includes scrapping sub-division restrictions Need subsidies for the poor Need a land tax See: Binswanger, Hans, Klaus Deininger and Gershon Feder. 1995. “Power, Distortions, Revolt and Reform in Agricultural Land Relations.” In Jere Behrman and T.N. Srinivasan (eds). Handbook of Development Economics. Vol. 3B. Amsterdam: Elsevier. Land markets: Sub-division restrictions:  Land markets: Sub-division restrictions Restrictions based on pre-independence “viability norms: income standard not economies of scale Prevents small farmers from emerging through the market Complicates market-assisted land reform Still in place in Zimbabwe, South Africa, and Namibia Viability:  Viability ”viability”—not in Economic text books Biology: “The capacity of living, or being distributed, over wide geographical limits.” “viable farm size”—level of income that is socially acceptable and the farm size needed to achieve this “minimum wage” for commercial farmers “viable” farm size—need, say, US$20,000 per year, so need a farm of 1,000 ha this has nothing to do with economies of scale. Scrap sub-division act:  Scrap sub-division act Sub-division law sets a minimum “viable” farm size below which no farm can be sub-divided every sub-division has to be approved by the Minister Scrap the Act Protect environmentally fragile or valuable areas (strong legislation is already in place) Start using the laws and punish those who do environmental damage Land markets: land tax:  Land markets: land tax Politically attractive revenue Can lower difference between asset and agricultural value of land But Zimbabwe: aborted because of pressure from Fast Track’s new farming middle class Namibia: in progress, initial reports look good Namibia taxes foreign land owners a higher tax, just like, for instance, Victoria (Australia). Intermezzo—foreign ownership of land:  Intermezzo—foreign ownership of land The perception is that foreigners: drive up land prices because they are generally more wealthy than local investors Are less receptive to community and social concerns than South African investors To keep land prices in check and level the playing field, implement a land tax and tax foreigners at a higher rate Ensure truly participatory and transparent land use planning and zoning regulations at the local level Intermezzo—continued :  Intermezzo—continued The report correctly says that regulation of land ownership does not undermine investor confidence But uncertainty does, and unfortunately this report increases that uncertainty And process of studying, consulting, going to Cabinet, going back to formulating principles, consulting again, proposing legal amendments, consulting again, going back to Cabinet, etc. in and of itself creates a very long period of uncertainty Intermezzo—continued:  Intermezzo—continued There is no attempt made to do an initial “red tape” or regulatory burden analysis when sifting through the options The solution proposed involves substantial discretionary decision-making by officials (p. 40) This opens the door wide for so-called “side payments” Report states that the land tax option was “popular”, and several countries use it (Namibia, France, The US and New Zealand), but it does not feature in the recommendations Land markets land tax continued:  Land markets land tax continued Simple administration: Area-based assessments, self-declaration Exempt small holders/poor (e.g. set maximum farm size by agro-climatic zone) Tax the land Not the value of improved land, investments (as urban property rates do, including the new Property Rates Act) Would reduce land prices, average farm size, amount of under-used land, speculative premium Note: cannot be the only instrument to implement redistribution In South Africa, the Property Rates Act allows agricultural land to be taxed, but the Act is only being implemented in a few municipalities, with most others pushing the deadline for implementation towards 2009 (the deadline). Land tax in the old Transvaal….:  Land tax in the old Transvaal…. Economies of scale:  Economies of scale a 1 ha farm may generate R60 in profits per ha, so R60 in total And a 1,000 ha farm may generate R50 in profits per ha, so R50,000 in total Which one is more efficient? Which one is more “viable”? Notes: profits is NOT just cash income, but includes for instance value of own consumption A bag of maize produced by an unemployed subsistence farmer on unused land has a one-to-one impact on the trade balance Economies of scale Cont.:  Economies of scale Cont. Economies of scale in agriculture (world wide) are limited Current US agriculture is characterized by diseconomies of scale But as overall incomes rise, farm sizes rise Increase in farm size over time in the US is fully explained by income growth and subsidies Not by economies of scale Question: if there were economies of scale in agriculture in South Africa, then why the sub-division restriction and the regressive land tax? South African reality check:  South African reality check Well thought-out decentralization frameworks in place Excellent sectoral policies But empowerment of local governments and communities is inadequate Many programs are still financed and implemented in complex stove pipes by the central sector departments Planning requirements, implementation modalities and fiduciary controls are strangling local capacity and driving beneficiaries crazy… Beneficiaries are not able to access funding for their entire projects from single sources See: South Africa - In Search Of Land and Housing in the New South Africa: The Case of Ethembalethu Much more than land needs to be financed in land reform: land is only 30-40 percent of costs:  Much more than land needs to be financed in land reform: land is only 30-40 percent of costs Supply-driven implementation through “stovepipes” needs reform: NAFU’s “one-stop shop” idea:  Supply-driven implementation through “stovepipes” needs reform: NAFU’s “one-stop shop” idea But how?:  But how? Beneficiaries needs are integrated To be met by a single budget which disburses depending on demand and quality of proposals One accountability mechanism One appraisal and approval procedure A single operational manual As part of local government development plan Which should constitute the “contract” between all stakeholders Start with impact evaluation as part of implementation roll out, not afterwards… Develop capacities via: Training Learning by doing New consensus is emerging…:  New consensus is emerging… Both local government and communities need to be fully empowered to play their part By moving from consultation and facilitation to empowerment models Allow beneficiaries to design and implement their own projects, with assistance from competent service providers Line departments need to move from direct service provision to policy, facilitation, and monitoring and evaluation roles Role of the private sector:  Role of the private sector Existing program, the Land Redistribution for Agricultural Development (LRAD), is, on paper, very flexible and allows beneficiaries to chose their service provider (In practice, government officials and consultants run it, but we hope that this will change) Three ideas for direct private sector involvement: Private sector can work with beneficiaries to purchase land and establish agricultural production (funded by the LRAD grants) Service providers could develop a farm and make it suitable for small and/or medium-scale family farms, with beneficiaries purchasing the farms using the LRAD grants (developed model) Commercial banks could request government to be allowed to manage the grant, if they provide loans (agency model)

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