Social Democratic Development II:

Land Equality and Economic Growth

 

    

 

 

 

 

 

In an earlier posting on this site, I argued for the existence of social democratic development. This is the creation of economic growth through increasing social equality. We are used to a discussion of trade-offs in which inequality promotes economic growth by motivating entrepreneurs to take the risks necessary to obtain great rewards. Anything that promotes social equality is viewed as a liberal and anti-business because one is taxing the productive and giving money to the unproductive.

    

 

Unfortunately, the facts do not support the idea that inequality supports growth. Statistically, egalitarian nations are likely to have much higher growth rates than do unequal nations. See the suggested readings below for the statistical literature on social equality and growth.

    

 

This particular essay is on one of the mechanisms by which equality produces growth. It is the rural version of the general argument. Just as egalitarian societies have higher rates of economic growth, rural areas where land is more equally distributed have better agricultural economies than do rural areas where land is distributed unequally. This means getting rid of very small holdings (minifundias) that are too small to support modern technology or the use of capital improvements – and getting rid of latifundias (extremely large estates) that are notoriously unproductive.

    

 

The statistically poor productivity record of gigantic estates has been long established in development economics. To give one recent example from a 2018 study of Malawi, small farms outperformed giant estates in five out of the six of the crops that were examined. In the Pakistani Punjab, the largest farms are less than 40% as productive as smaller farms; in Muda, Malaysia, the largest farms are only 70% as productive as smaller farms. If you want a book length review of this finding in countries all over Latin America and Africa, you can try Albert Berry and William Cline’s Agrarian Structure and Productivity in Developing Countries. The evidence that large estates are less efficient than small and middle sized estates is overwhelming. Redistributing land from large estates to smaller holders will generally raise agricultural output. The problems come both from the super-small holdings and the super-large holdings.

    

 

Why are super-small holdings so inefficient?

    

The answer here is obvious. Super-small farms are so small and so marginal, that the owners can not afford to make improvements. The farmers on super-small plots are super-poor. They barely have enough cash to survive, let alone purchase farm equipment or superior seed.

    

Why are super-large landholdings so inefficient?

1.) Small family farmers use every acre of land they own. Latifundists do not use much of their land. In Malawi, small holders cultivated 70% of their land. Latifundists cultivated only 15% of their land. Leaving some land uncultivated can be rational. Crop rotation usually involves one to three years of land lying fallow. However, if one is not using 85% of one’s land, it is not because the land is lying fallow.

Why don’t latifundists use all their land?​

I. Some of the land is bought for reasons of political power. If you own land, you frequently politically control the people who live on it. When elites are contesting other elites for power, they want all the loyal citizens and all the loyal police forces they can get.

II. Some of the land is bought for speculation. People buy land in the hope that it will be more valuable someday.

III. There is simply too much land for them to Manage efficiently. Working a farm means really knowing what is going on in each particular corner of the estate and what every separate piece of terrain needs. Landowners with vast estates can’t keep track of it all; they let some of it go idle so they can concentrate on familiar subareas.

2.) Workers on small farms are more productive than are workers in latifundia. On a small farm, a family typically owns its own land and is working to maximize its own profit. Family farmers are essentially capitalists. They get up early and work long days because they will personally profit from the results of their hard work.

Things are different on large estates. The latifundist hires paid labor. The paid laborers have no personal long-term stake in the farm. As long as they get their paycheck, they are happy. So agricultural workers tend to slack off.

To be sure, there are ways to keep agricultural workers from slacking off. One can hire overseers and supervisors to keep the workers working. Think of the stereotypical brutal plantation boss armed with a bullwhip and a pistol. Harsh supervision can make sure paid laborers do their job. But the latifundist still has to pay for his supervisory labor force. On family farms, all the family members work hard for free.

 

 

3.) Latifundists often use their political influence to protect themselves from having to make their farms competitive. Small family farmers cannot play the political card – and have to respond to competition with technological upgrades.

Historically, the most famous cases of smaller land holdings being more productive occurred in the nineteenth century in Europe. In the 1870’s and 1880’s, the United States had become the dominant grain producer in the world. Most of its farms were family farms. The Great Plains were highly fertile. America was producing vast amounts of grain that were flooding the cereal markets of Europe. The competition from the United States was driving a lot of European grain farmers out of business.

Denmark, which was egalitarian, used this stimulus to become a major agricultural exporter. Spain which was latifundist, became one of the least productive agricultural economies in Western Europe.

The large Spanish landlords turned to Madrid and got tariffs to keep American grain out of Spain. Because they had political protection, their profits were safe. They had little reason to innovate. As a result, as time passed, Spanish agriculture became less efficient.

Danish farmers were small and lacked the political influence of the Spanish latifundistas. Facing intensive American competition, they responded by moving out of cereal farming and into advanced dairy farming. They figured out that the profit margin on butter was far superior to that of milk, or of grain. Because most of the Danish farms were middle-sized family farms with some capital, they could make the investments in butter-making and herd maintenance that could make their farms efficient. It did not hurt that Danish farmers were highly educated, and that they collaborated with each other in technological cooperatives to develop new and better technologies for increasing dairy yields. Soon Denmark was one of the world’s largest exporters of butter. In Denmark, middle sized farms allowed Adam Smith’s market forces to lead to improvements in production skill and in profitability. The latifundists in Spain never adapted. Spain never developed a significant export crop and fell behind Mediterranean arch-rivals France and Italy.

 

 

The beneficent economic effects of equality in land were not confined narrowly to Europe. Reducing land inequality was one of the keys of producing the rapid economic growth of the East Asian Tigers: Japan, South Korea and Taiwan. Japan, South Korea and Taiwan have experienced some of the highest rates of economic growth in the history of capitalism. All three nations commenced their industrialization with land reform, taking land from large estates and redistributing it to poorer peasants. These transfers were mandatory, although the large landlords were generally compensated for their losses. In all three nations, agricultural yields and productivity improved dramatically after the land reforms. In all three nations, the increased food supply freed up labor forces from having to cultivate food and allowed them to become factory workers. In all three nations, the improvement in agricultural productivity allowed these nations to industrialize with reduced needs to spend foreign exchange on food imports.

 

 

The evidence from the contemporary Global South, from historical Denmark and Spain and from East Asia all show that increasing social equality by reducing latifundia and keeping farms intermediate-sized had dramatic effects both on agricultural growth and on economic growth as a whole.

    

 

Does social democratic work for other spheres of activity than agriculture? We address that question in future postings.

For More Information

For general statistical findings linking equality to faster economic growth in nations as a whole, see Cingano, Federico. (2014), “Trends in Income Inequality and its Impact on Economic Growth”, OECD Social, Employment and Migration Working Papers, No. 163, OECD Publishing. This essay reviews the cross-national econometric findings and has a large bibliography.

 

Bhagwati and Chakravarty’s article on India in the 1969 American Economic Review. There is, as mentioned before, Albert Berry and William Cline’s 1979 Agrarian Structure and Productivity in Developing Countries. For more recent studies see the bibliography in Binswanger, Deininger and Feder’s chapter in Volume III of Behrman and Srinivasan’s Handbook of Development Economics.

The Malawi material comes from Deininger and Xia’s article in World Development 2018. See Deininger and Xia’s Inefficiency of Large Estates in Malawi World Development 2018

The argument on Denmark and Spain was first made by Dieter Senghaas in his European Experience: Historical Critique of Development Theory. That book makes a strong argument for social democratic development as being a key principle for understanding the entire history of economic growth. Senghaas’s book gets my highest recommendation.

On land reform and East Asian industrialization, see Irving Kramer’s article on Meiji Japan in the journal Land Economics (1953). For South Korea and Taiwan, see the work of Alice Amsden, notably any of her books on South Korea or for a global view her Rise of the Rest: Challenges to the West from Late Industrializing Economies.