World Bank Document

DISCUSSION PAPER Report No.: ARU 66 Public Disclosure Authorized Land Ownership Security, Farm Productivity, and Land Policies in Thailand by Garshon Feder, Tongroj Onchan and Chira Hongladarom Public Disclosure Authorized Public Disclosure Authorized Research Unit Agriculture and Rural Development Department Operational Policy Staff World Bank April 1987 Public Disclosure Authorized The views presented here are those of the author(s), and they should not be interpreted as reflecting those of the World Bank, The authors are a staff member and consultants of the World Bank. However, the World Bank does not accept responsibility for the views expressed herein which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported in part by the Bank; they do not necessarily represent official policy of the Bank. The designations employed and the presentation of material in this document are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, area or of its authorities, or concerning the delimitation of its boundaries, or national affiliation. LAND OWNERSHIP SECURITY, FARM PRODUCTIVITY, AND LAND POLICIES IN THAILAND By Gershon Feder Tongroj Onchan Chira Hongladarom Yongyuth Chalamwong The World Bank Thammasat University Washington, DC Kasetsart University Bangkok, Thailand Bangkok, Thailand April 1987 "In legislation, the most important thing is security. If no direct laws are made respecting subsistence, this object will be neglected by no one. But if there are no laws regarding security, it will be useless to have made laws respecting subsistence -- command cultivation, you will have done nothing; but secure to the cultivator the fruits of his labor, and you most probably have done enough." Jeremy Bentham, 1748-1832 Summary This empirical study assesses the economic implications of land ownership security in rural Thailand. Ownership security is defined in this study as the possession of legal ownership rights, certified by a title document, over a given tract of land. Ownership security entails protection from eviction, and the ability to legally sell or mortgage the land. Economic theory postulates that ownership security stimulates investment incentives and land improvements because the farmer has greater certainty of his ability to benefit from the returns on his investments. Ownership security also implies that titled farmers are able to use their land as loan collateral, and thus facilitates their access to a larger volume or longer term, low-cost institutional credit. Enhanced access to credit and better investment'incentives imply more actual investment and greater use of production inputs among farmers with ownership security. Together, these factors suggest that securely owned land (i.e. titled land) is more productive than untitled land. Since titled land is a more secure asset and produces more income, its market value is higher than that of untitled land. There has been a paucity of rigorous empirical studies which confirm these propositions or which measure the effects of ownership security on productivity. In Thailand, such information is warranted, as the lack of ownership security characterizes about one million farm households and about one-fifth of the agricultural land. Most of these households are squatters on officially designated forest reserve lands. Most squatters have been settled on their farms for over a decade. The risk of eviction is rather low for rural squatters due to socio-political constraints. Restrictions on land transactions in the,forest reserves are not strictly enforced, and squatters' lands are illegally traded as frequently as legally owned land. However, squatters in Thailand cannot use their land as legal collateral for production and investment loans required to increase agricultural productivity. To assess the implications of ownership insecurity in Thailand, farmer surveys were conducted in four provinces (Lop Buri in the central region, and Nakhon Ratchasima, Khon-Kaen and Chaiyaphum in the Northeast). In each province the sample included (1) squatters in forest reserve land, and (2) titled farmers in neighboring areas outside the forest reserves. The samples of farmers and squatters in each province thus operate in similar agroclimatic environments. In Chaiyaphum province, the sample of squatters was further delienated in order to assess what effect the government's usufruct (STK) certificate program had on squatters' productivity. Some proponents of the program believe that providing squatters in the forest reserves with a usufruct certificate will induce better ownership security. Accordingly, to examine the effect of the usufruct certificate, the squatter sample in Chaiyaphum was composed of two groups: STK certificate recipients and non-recipients. The survey revealed that the majority of sampled farmers believe that the most important aspect of legal ownership is improved access to - ii - institutional credit. This is compatible with the low eviction rate and corresponding low level of uncertainty about a farmer's continued accessto the land. The responses suggest that secure ownership must have a substantial impact on credit access. Similarly the data would suggest that providing usufruct rights to those squatters who have used the land for a length of time would not significantly improve performance: The perceived risk to continued land use (i.e. tenure insecurity) was low to begin with, and the ability to pledge land as loan collateral is unchanged. The study addresses these propositions. An examination of credit transactions by sample farmers indicated a marked difference between institutional and hon-institutional lenders. Institutional lenders often require loan collaterals, while non- institutional lenders do-not. This is because non-institutional lenders face a lower borrower-specific risk since they are familiar with the farmers in their area and have better enforcement possibilities. Titled farmers pledged land as collateral in more than half of their institutional loans. In contrast, squatters, unable to pledge land as collateral, offered mostly a collateral substitute in the form of a group guarantee. Since a group guarantee is an inferior substitute, the amount of institutional credit per unit of land obtained by squatters was less than that obtained by titled farmers. While access to non-institutional credit was not significantly affected by ownership security, the cost of such credit is substantially higher. Further, in areas where the non-institutional credit market is not well developed, the loan amounts are limited. Econometric analysis utilizing a disequilibrium model confirmed that the supply of institutional credit is significantly affected by the provision of land collateral. The credit advantages associated with land collateral were larger in provinces where production is subject to high weather risks. Legal owners thus enjoyed substantial advantages in access to cheaper institutional credit. They received significantly more longer term credit and significantly more credit from commercial banks. Commercial bank loans in almost all cases required a land collateral. The majority of borr,,wers were credit-rationed by institutional lenders. Usufruct certificates had no effect on increasing the squatters' access to institutional credit. Data on land values reported by the sample farmers were used to estimate econometrically the value of legal ownership in the study areas. The estimates account for variables which might affect land values (e.g. soil quality, market proximity, etc.). In the provinces studied, ownership security had a statistically significant effect on land prices. The effect is substantial in the northeastern provinces, where the value of untitled land ranges between one half and two-thirds the value of titled land. The value of legal ownership is much smaller in Lop Buri province. In Lop Buri the informal credit market is relatively well developed, a fact which probably accounts for the lower value of secure legal title since informal creditors usually do not require a legal collateral. Econometric analysis of capital formation established that in the three northeastern provinces, ownership security induced significantly higher capital/land ratios, holding other farmer attributes constant. The differences in capital/land ratios between titled and untitled farmers - iii - ranged from 56 to 253 percent. In Lop Buri the impact of ownership security on capital formation was not significant. Additionally, the adoption of two types of land-improving investments was shown to be significantly affected by ownership security in three of the provinces, holding farmer and land characteristics constant. In three provinces, data at the household level were suitable for an econometric analysis of the impact of ownership security on input and output. The results in two northeastern provinces confirmed that, ceteris paribus, titled farmers use significantly higher amounts of variable inputs (labor, power, other cash inputs) per unit of land than do untitled farmers. Crop value per unit of land was also higher, by 12 to 26 percent. Differences in Lop Buri province were smaller, .and not statistically significant. However, -when the analysis used a more general definition of farm

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