Emerging Emerging Challenges of Challenges of Land Rental Land Rental

MarketsMarketsA Review of the Available A Review of the Available Evidence for Central and Eastern Evidence for Central and Eastern Europe and Former Soviet Union Europe and Former Soviet Union

CountriesCountries

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Importance of land market Importance of land market developmentdevelopment

Transfer land from less to more efficient Transfer land from less to more efficient producersproducers Efficiency impactEfficiency impact

Land transfers allow productive but landless Land transfers allow productive but landless households or households owning little land to households or households owning little land to access landaccess land Equity impactEquity impact

Land sales markets provide a basis for the use Land sales markets provide a basis for the use of land as collateral in credit marketsof land as collateral in credit markets

The ability to formally prove land ownership at low The ability to formally prove land ownership at low cost and to transact land will stimulate the cost and to transact land will stimulate the development of formal financial markets and access to development of formal financial markets and access to formal credit for rural householdsformal credit for rural households

Result: important equity and efficiency impactResult: important equity and efficiency impact

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Problems with the land Problems with the land market developmentmarket development

Transaction costs that complicate or impede land Transaction costs that complicate or impede land transfers decrease efficiency. transfers decrease efficiency.

Land markets in the transition countries are still Land markets in the transition countries are still characterized by the existence of significant transaction characterized by the existence of significant transaction costs in the rural land markets, constraining access to costs in the rural land markets, constraining access to land for rural households willing to start up or enlarge land for rural households willing to start up or enlarge their farm and reinforcing the persistence and their farm and reinforcing the persistence and dominance of large scale corporate farms.dominance of large scale corporate farms.

Transaction costs include official registration and notary Transaction costs include official registration and notary fees but also search costs to find potential fees but also search costs to find potential landlords/tenants, negotiation costs to set contract landlords/tenants, negotiation costs to set contract terms, costs to enforce contract terms, withdrawal coststerms, costs to enforce contract terms, withdrawal costs Result: incomplete Result: incomplete records, absence of or unclear boundary records, absence of or unclear boundary

definition, unknown owners, unsettled inheritance claims within definition, unknown owners, unsettled inheritance claims within familiesfamilies, , andand incomplete information all increase transaction incomplete information all increase transaction costscosts

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Why rental markets Why rental markets matter?matter?

Land renting is fully consistent with Land renting is fully consistent with modern agricultural practicemodern agricultural practice

Is widespread in developed Is widespread in developed economieseconomies

Can have positive effects on income Can have positive effects on income distribution and poverty reductiondistribution and poverty reduction

Can provide these benefits with more Can provide these benefits with more flexibility and lower transaction costsflexibility and lower transaction costs

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Key findings on land rental Key findings on land rental markets in transition markets in transition

countriescountries In ECA countries renting land is more common In ECA countries renting land is more common

than buyingthan buying There are large country differences in the share There are large country differences in the share

of rented land and this is highly correlated with of rented land and this is highly correlated with the importance of corporate farms. the importance of corporate farms.

Almost all registered family farms own some land Almost all registered family farms own some land and rely on a mixture of rented land and owned and rely on a mixture of rented land and owned land for cultivation. land for cultivation.

Unregistered family farms mostly own a small Unregistered family farms mostly own a small amount of land and rely almost entirely on this amount of land and rely almost entirely on this land for their cultivation.land for their cultivation.

Corporate farms own very little land and rely Corporate farms own very little land and rely almost entirely on rented land for cultivation. almost entirely on rented land for cultivation.

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Findings - MoldovaFindings - Moldova Registered family farms are renting land Registered family farms are renting land

(23%) as well as buying (23%); (23%) as well as buying (23%); while un-registered family farms are mostly while un-registered family farms are mostly

renting out land (38%) but not selling. renting out land (38%) but not selling. More than 85% of the land used by More than 85% of the land used by

corporate farms is rented . Only around one corporate farms is rented . Only around one third purchased land but the amount is very third purchased land but the amount is very small compared to the cultivated land area. small compared to the cultivated land area.

Half of the agricultural land is used by Half of the agricultural land is used by corporate farmscorporate farms

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Key findings on land rental Key findings on land rental markets in ECA – some markets in ECA – some

tables/figurestables/figuresShare of households that are Share of households that are Renting in landRenting in land Renting out landRenting out landMoldova (2004) RFFMoldova (2004) RFF 2323 44Moldova (2004) UFFMoldova (2004) UFF 44 3838

Moldova - RFF

0

5

10

15

20

Class 1 Class 2 Class 3 Class 4 Class 5

Farm size

Are

a bo

ught

/rent

ed

Rent-RFF Bought-RFF

Class 1: 0-1.8; Class 2: 1.8-2.9; Class 3: 2.9-3.7; Class 4: 3.7-6.6; Class 5: 6.6<

Share of households that are Share of households that are Selling landSelling land Purchasing landPurchasing land

Moldova (2004) RFFMoldova (2004) RFF 22 2323

Moldova (2004) UFFMoldova (2004) UFF 22 55

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Moldova Moldova Unregistered family Unregistered family

farmsfarmsAmount of land ownedAmount of land owned 2.52.5Amount of land cultivatedAmount of land cultivated 1.51.5Share of households that sold landShare of households that sold land 22Share of households that purchased landShare of households that purchased land 55Share of households that rent in landShare of households that rent in land 44Share of households that rent out landShare of households that rent out land 3838

Czech Republic

(1999) Slovakia (1999)

Hungary 1997)

Azerbaijan (2004)

Bulgaria (2004)

Moldova (2004)

Kazakhstan (2004)

Area, ha Cultivated 1354 1989 1837 200 1434 883 5413 Owned 22 16 85 0.4 53 15 50 Rented 1341 1965 1811 200 1381 868 5363 Share of land cultivated land area Owned 0.48 1.42 1.42 0.20 3.71 15.08 0.93 Rented 99.52 98.58 98.58 99.80 96.29 84.91 99.07 Main lessor Members or

partners Members or

partners Members or

partners Municipality/st

ate Members Members Members

Key findings on land rental Key findings on land rental markets in ECA – some markets in ECA – some

tables/figurestables/figures

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Constraints and Constraints and Imperfections:Imperfections:

Land Transaction CostsLand Transaction CostsTransaction costs rise when:Transaction costs rise when: owners of the land want to withdraw and reallocate their land owners of the land want to withdraw and reallocate their land

from the historical users – most often Corporate Farmsfrom the historical users – most often Corporate Farms property rights are unclear or insecure (e.g. co-ownership of property rights are unclear or insecure (e.g. co-ownership of

rights, land code changes regulary)rights, land code changes regulary) there are excessive or high notary fees, taxes and other there are excessive or high notary fees, taxes and other

administrative chargesadministrative charges

Result: Result: Corporate farms dominate land use and land rentalCorporate farms dominate land use and land rental Rental prices paid by corporate farms are often much lower Rental prices paid by corporate farms are often much lower

than rental prices paid by individual farms than rental prices paid by individual farms more difficult to more difficult to access land for land-poor but efficient households access land for land-poor but efficient households efficiency efficiency losses. losses.

Corporate farms are more likely to pay in kind, a less Corporate farms are more likely to pay in kind, a less transparent payment systemtransparent payment system less liquidity for land owners less liquidity for land owners welfare losses welfare losses

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Corporate farms are more likely to pay Corporate farms are more likely to pay in kind, a less transparent payment in kind, a less transparent payment

system.system. It is often older and less educated land owners who gain It is often older and less educated land owners who gain

additional income through renting out landadditional income through renting out land Payment in kind may come late or not at all – decreasing Payment in kind may come late or not at all – decreasing

the welfare benefits of renting out the welfare benefits of renting out

Percentage of transactions with (total or partial) cash payment

0

20

40

60

80

100

AZ BG KZ MD

OUT IN

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Constraints and Constraints and Imperfections:Imperfections:Credit market Credit market imperfectionsimperfectionsWhen financial markets do not work well or When financial markets do not work well or

where confidence in money as a repository where confidence in money as a repository value is lowvalue is low

Land has to be purchased out of own Land has to be purchased out of own savings, leaving little liquidity to invest in savings, leaving little liquidity to invest in technology, equipment or quality inputs;technology, equipment or quality inputs;

Land is a storage of wealth;Land is a storage of wealth; Land may be purchased as a hedge against Land may be purchased as a hedge against

inflation or as an investment asset;inflation or as an investment asset;Result: efficiency of land sales market is Result: efficiency of land sales market is

constrained constrained stimulating the development stimulating the development of rental markets becomes even more of rental markets becomes even more important important

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Constraints and Constraints and Imperfections:Imperfections:

Labor market imperfectionsLabor market imperfectionsLabor market constraints may be a fundamental Labor market constraints may be a fundamental

cause of fragmentation and a combination of cause of fragmentation and a combination of improved off-farm employment, retirement improved off-farm employment, retirement schemes and rental markets can help to address schemes and rental markets can help to address the major land consolidation.the major land consolidation.

- No evidence that fragmentation of land No evidence that fragmentation of land ownership causes fragmentation of land use ownership causes fragmentation of land use

- Fragmentation has less to do with the land Fragmentation has less to do with the land market than with the labor market.market than with the labor market.

Result: Result: - Rental markets have allowed countries to Rental markets have allowed countries to

overcome fragmented ownership for consolidated overcome fragmented ownership for consolidated land use land use Priority should be given to Priority should be given to stimulating land rental, rather than consolidation stimulating land rental, rather than consolidation projectsprojects

- To solve the land fragmentation problem it is To solve the land fragmentation problem it is important to tackle labor market problems. important to tackle labor market problems.

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ConclusionsConclusions

To realize the potential of land To realize the potential of land rental markets, governments need to rental markets, governments need to turn their attention to creating the turn their attention to creating the enabling environment and enabling environment and supporting infrastructure for these supporting infrastructure for these markets to develop.markets to develop.

Government action can be organized Government action can be organized in 4 broad categories.in 4 broad categories.

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What governments can What governments can do.do.

1.1. Secure individual property Secure individual property rightsrights by focusing on reducing by focusing on reducing transaction costs, completing transaction costs, completing demarcation, improving land demarcation, improving land administration systems, administration systems, guarenteeing a stable land code, guarenteeing a stable land code, enhancing transparency and enhancing transparency and improving access to information on improving access to information on the land market.the land market.

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What governments can What governments can do.do.

2. Encourage efficient land rental 2. Encourage efficient land rental markets markets whilewhile protecting the rights protecting the rights of small landholders by providing of small landholders by providing better information about better information about transactions to small land owners to transactions to small land owners to enhance their bargaining power, and enhance their bargaining power, and providing trusted mechanisms for providing trusted mechanisms for resolving contract disputes.resolving contract disputes.

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What governments can What governments can do.do.

3. Activate the land rental market by 3. Activate the land rental market by addressing constraints in other addressing constraints in other markets:markets: in credit and output in credit and output markets to help family farms become markets to help family farms become more competitive and stimulate the more competitive and stimulate the demand for land; and in labor demand for land; and in labor markets to facilitate both the markets to facilitate both the movement of labor out of agriculture movement of labor out of agriculture and the release of agricultural land.and the release of agricultural land.

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What governments can What governments can do.do.

4. Prevent further land 4. Prevent further land fragmentation and complicated fragmentation and complicated land ownership arrangementsland ownership arrangements by simplifying laws and procedures by simplifying laws and procedures to divide land among heirs. to divide land among heirs.