Land transactions when markets are repressed: Evidence from Ethiopia

RESEARCH QUESTION

Well-functioning land markets and institutional arrangements are essential for industrialization and the development of commercialized agriculture. In most African countries, land markets are poorly developed, constraining the transfer of farmland from subsistence usage to more profitable purposes. Ethiopia is an extreme example, as the government maintains ownership of all land and does not allow users to transfer their title to others. Instead, the government has its own ‘market’ mechanism: land is expropriated from farmers and allocated (via leases) to industrial uses. Without land markets, prices do not offer any information and incentives. This encourages speculation by those able to acquire land and makes the determination of compensation for farmers very challenging. In this work we address two questions: What is the welfare loss, in efficiency terms, from this institutional arrangement? What are the social costs and benefits for farmers from the compensation scheme and the increased tenure insecurity?

PROJECT

Expropriation of farmland, especially when compensation does not fully reflect the market value of land, distorts the investment behaviour of farmers toward low return, short run subsistence crops. Evidence from a panel of Ethiopian farmers shows that farmers who fear their land will be expropriated are less likely to invest in tree crops, which would be more profitable than subsistence crops in the medium to long term. Although recent reforms of land institutions have improved the efficiency of land markets between small farmers, the prospect of expropriation for external investors remains a source of insecurity. Land expropriation is an inevitable consequence of industrializing in a country where land markets do not exist; however, proper compensation policies can mitigate the effects of increased tenure insecurity. In order to assess the social costs and benefits from the compensation scheme used for farmers, we use a unique natural experiment to evaluate the impact of compensation payments before and after they are paid, in Kombolcha town (in north-central Ethiopia), which has recently been designated as an industrial centre. A number of new infrastructure and industrial projects were recently initiated, requiring the transfer of land from agricultural use to industrial and commercial. About 500 hectares has recently been reallocated for an airport and a textile factory, although the transfer is only partly complete and only some of the payments have been made. Using sophisticated matching techniques, neighbouring farmers will be identified to construct an appropriate comparison group for the farmers that will lose their land. Understanding the ‘social cost’ of shifting land from agricultural uses to industrial uses can help governments to more accurately price the land in a setting where market mechanisms are not used.