Colonial Origins of Property Rights to Land and Productivity Implications: The US Midwest and the Argentine Pampas Compared Eric C. Edwards, Martin Fiszbein, and Gary D. Libecap1 January 30, 2020 Abstract English colonial policies and subsequent US legislation supported small-farm distributions of property rights to land in temperate regions. Farms used family labor, and land was a commercial asset that was actively traded. In contrast, Spanish colonial and post-revolutionary practices distributed land in large grants held across generations for social position. In temperate regions, large farms relied upon seasonal immigrant labor and short-term tenants. Viewing farms as firms, we use the insights of Harold Demsetz and others to compare farm sizes and land market responses to varying geo-climatic conditions across comparable areas of the US Midwest and the Pampas of Argentina with digitized census data during the export grain boom of the late 19th and early 20th centuries. We find that Argentine farms were larger and that farm sizes were less flexibly adjusted than in the US, where the transaction costs of exchange were lower. Moreover, other evidence is consistent with moral hazard, shirking, and higher monitoring costs associated with temporary contract labor, compared to family labor. There were holdups during key seasonal agricultural production periods and apparent less investment in rural physical and human capital in Argentina compared to the US with potential long-term productivity effects. 1 North Carolina State University (Edwards); Boston University and NBER (Fiszbein); and University of California, Santa Barbara and NBER (Libecap). We thank seminar participants at the Seminar on Property, Solstrand, Bergen, Norway; the Property and Environment Research Center, Bozeman, Montana; the Center for Economic Liberty, Arizona State University; as well as Andrew Hutchins for research assistance. 1 1. Introduction The sharp differences in income per capita between Argentina and North America have attracted considerable attention among development economists and economic historians. Like the United States and Canada, Argentina was a resource-rich economy that rapidly integrated into world markets in the 19th century, and had glowing economic prospects at the turn of the 20th century. But things did not turn out as positive as predicted and economic performance lagged relative to its North American counterparts. In 1800 per-capita incomes in Argentina slightly exceeded those of the United States; were approximately 52% of US levels by 1900; but fell to 35% near the end of the 20th Century (Engerman and Sokoloff 1994). One of the leading explanations for Argentina’s underperformance is land concentration due to colonial policies that distributed land in large grants to favored elites (Sokoloff and Engerman 2000; Solberg 1987; Stein and Stein 1970). The mechanism by which concentrated ownership and resulting economic outcomes were linked, however, is implied, but not explicit in this literature. The emphasis is on persistent, large-scale production units, lower investment in human capital, reduced incentives for immigration, and limited development of inclusive political institutions, resulting in political instability. Our comparative examination of the agricultural economies of the Pampas of Argentina and the US Midwest, by contrast, draws upon the work of Harold Demsetz (1964, 1967, 1968, 1969), Alchian and Demsetz (1972), and others for a clearer analytical framework. We model farms as firms. We outline the basis for the colonial origins of different property rights to land and draw implications for long-term productivity effects. We examine the consequences of principal/agent relationships, monitoring costs, and shirking when there were ongoing differences in farm sizes and reliance upon internal versus external agricultural labor contracts between the US and Argentina. We then explore the impact on transaction costs, property rights adjustments, market exchange, and adaptation to changes in external conditions when farms were held for social and political status as compared to being easily traded and modified as commercial assets. The focus on farm land is important because agriculture has played an outsized role in the development 2 of the Argentine economy, with agricultural production contributing 13% to GDP as late as 1965 and 9% in 2010, compared to around 1% in the US in the same years.2 As we describe, English colonial policy dispersed land mostly in small plots, and small farm owners relied upon family labor. Larger land grants were quickly broken up and sold. After independence, there was a powerful congressional lobby supporting continued small-farm distributions of government land (Kanazawa 1996). By 1862, small land allocations of 160 acres or less were enshrined in the Homestead Acts and Morrill Acts. Efforts to enlarge homesteads in the late 19th and early 20th centuries as the frontier moved into dryer areas generally were unsuccessful (Hansen and Libecap 2004). In all cases, property rights were secure and land was a commercial asset, readily traded for capital gains and to adjust to shifting market and climatic conditions. In contrast, in Argentina, like in other Spanish colonies, land was distributed by the Crown in large tracts to favored elites as estancias. Many estancias were extremely large, in some cases larger than 40,000 acres (Amaral 1998). These estates were held by the owners across generations as a source of political and social influence. This motive would raise the transaction costs of land market exchange, which appears to have been limited (Scobie 1964; Adelman 1994). In contrast to US family farms, estancia owners relied on short-term labor contracts with temporary agricultural laborers and tenants.3 Our empirical analysis of the responses of farm owners to changing external factors by adjusting farm size focuses on parts of the US Midwest and the Argentine Pampas with similar topography, climates, and soil quality. We use digitized census data from the early 20th century when both areas were major grain producers and explore cross-country and within-country variation in farm size. We show that farm sizes in Argentina were larger than in the US, after controlling for climate, elevation, and other factors that might affect the choice of farm size. Within the countries, we find that in Argentine provinces where post-independence land allocation 2 http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TAD/CA(2018)9/FINAL&docLanguage= En https://www.statista.com/statistics/270001/distribution-of-gross-domestic-product-gdp-across-economic-sectors-in- the-us/ 3 The 1910 US Agricultural Census digitized by Haines (2010) also indicates that tenancy was prevalent in US agriculture, but these contracts appear to have been more long-term than existed in Argentina. And with access to capital and land markets, tenants could become owners, which seems not to have been the case in Argentina. 3 policies were somewhat less favorable to large holders and in the US where Spanish land grants existed along with later homesteads, farm size distributions were more similar. Moreover, across the two countries, we find that Argentine farm sizes were less adaptive to different geo-climatic conditions than in the US. Whereas in the US farm sizes and organization could be adjusted through market exchange, in Argentina that remedy appears to have been less used. In agricultural societies, farms are a key organizational unit and property rights to land are a crucial economic institution. They determine who owns the most critical asset in production and who can capture rents from it. Where property rights to land are broadly held, secure, and traded at low cost, information easily flows about new sources of value from changes in farm size, labor organization, and investment in physical and human capital. The realized capital gains from land exchange support local capital market expansion. By contrast, if land ownership is tightly held with limited incentives for trading, then there are fewer opportunities to obtain and incorporate such new information; land and capital markets will be less developed; and there are fewer prospects for more equal income and wealth distributions and related investment in human capital (Galor et al. 2009) and participation in the political process. Our work has implications for understanding fundamental institutional drivers of comparative economic history and development (North and Thomas 1973; North 1981, 1990; Engerman and Sokoloff 1997; Sokoloff and Engerman 2000; Acemoglu et al. 2001, 2002, 2005; North et al. 2009; Acemoglu and Robinson 2012) and the colonial origins of those many of those institutions (La Porta et al. 1998, 1999). 2. Conceptual framework 2.1 Farm Size, Agency Costs, and Productivity A classic literature documents an inverse relationship between farm size and productivity (Eastwood et al. 2010 for review). At initial stages of economic growth, such as in developing countries today, sources of increasing returns typically are absent and smaller farms are more productive (Foster and Rosenzweig 2017; Rada and Fugile 2019). This condition also appears to be the case in major grain-producing areas of the Midwestern US in the late 19th and early 20th centuries where small farms dominated and persisted across the region. The importance of firm ownership, size, and monitoring in determining the extent of use of internal relative to external, 4 specialized