Agricultural Misallocation, Occupational Choice and Aggregate Productivity - The Role of Insecure Land Rights and Missing Financial Markets

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Compared to advanced economies, most of the least developed countries feature extremely low agricultural labour productivity while productivity in non-agriculture is only modestly low. This particular inefficiency in agriculture is a puzzle. We believe that it can partly be explained by misallocation of production factors, in particular of land, across farms - e.g. some farms use too much land and others too little. Besides, comparing incomes of workers in agriculture and non-agriculture, it is puzzling why so many workers remain in agriculture, indicating misallocation across occupations.The aim of our project is twofold. First, we plan to identify causes of the aforementioned misallocation. Second, we intend to compute how policies that diminish misallocation could change agricultural, non-agricultural and, ultimately, aggregate productivity - i.e. by how much could they potentially increase GDP. Also, we are interested in the welfare effects of such policies on individuals with distinct characteristics (by skill, wealth, gender, age, occupation, etc.) - who stands to gain and who may lose? As such our proposal directly addresses Theme 1 of the present Call and indirectly addresses Theme 2 as well.We hypothesise two reasons for misallocation. The first one is insecurity of land rights. In many countries in sub-Saharan Africa, farmland formally belongs to the public while individual farmers are granted the right to farm it. Some farmers may lack the skills to use the granted land efficiently, but short of the right to sell or rent it out, they operate it. Meanwhile, skilled farmers are precluded from operating an efficient amount of land, either because they cannot get hold of communal land or because the remaining privately held land is expensive. This also affects the occupational choice of individuals. Inefficient farmers may remain in farming because it grants them free land usage while optimally they would prefer to sell that right and work in other sectors.Second, misallocation of land results from missing financial markets. Many farmers have no access to insurance against risks and also lack saving mechanisms such as a bank account. In such circumstances farmers may hold land not only for production purposes but also as an asset to be sold in the advent of adverse shocks. Farmers particularly keen on insurance may operate more land than what is efficient, draining resources from farmers who are relatively efficient but unwilling to pay an insurance premium for the land use. Still others may be efficient enough to increase landholdings, but are held back by credits constraints. We intend to measure the validity of our hypotheses by studying the specific cases of Ethiopia and Uganda, two countries characterised by a high fraction of land subject to insecure tenure and underdeveloped financial markets. For this we will collect the necessary data via a social survey. The choice of these two countries will help us distinguish between issues that are country-specific and those that can be extended to more regions in Sub-Saharan Africa and other developing countries sharing similar institutional and market features. Specifically, we plan to run surveys of individuals to estimate their decisions in the face of existing policies, prices and market arrangements.We will use structural general equilibrium model economies for our analysis. In such models decisions of distinct individuals and the formation of prices are all interdependent. This is crucial, because our proposed policy changes may alter the decisions of many individuals, which in turn affects relative prices and creates even more economic shifts. Our approach takes into account such feedback effects and is hence an ideal tool to understand what would happen if policies were to change.