March 2006 Europe and Central Asia The World Bank Chief Economist’s Regional Working Paper Series Public Disclosure Authorized Public Disclosure Authorized 1818 H Street, NW Infrastructure Department (ECSIE) Washington, D.C. The World Bank Vol. 1, No. 4 Washington, D.C. 36982 This study examines the challenges facing land rental markets in the Europe and Central Asia Region – to understand the patterns of land rental market development and constraints on fur- ther growth, and propose policy recommendations needed to improve their functioning in order Emerging Challenges of Public Disclosure Authorized Public Disclosure Authorized to achieve desirable equity and effi ciency outcomes. Land rental is widespread in the countries of Eastern Europe and Central Asia, largely driven Land Rental Markets by the way land was redistributed in the 1990s and by the role of corporate farms. Through- out the region, land rental markets have the potential to play an important role in stimulating A Review of Available Evidence for the Europe and much-needed land consolidation and farm restructuring for agricultural recovery and growth, and contributing to employment and poverty alleviation in rural areas. To realize this potential, Central Asia Region governments need to turn their attention to making land rental markets work better by creating the enabling environment and supporting infrastructure for these markets to develop. Government actions to support the development of land rental markets can be organized in four Public Disclosure Authorized Public Disclosure Authorized broad categories: securing individual property rights; encouraging effi cient land rental markets while protecting the rights of small landholders; activating land rental market by addressing constraints in other markets; and preventing further land fragmentation and complicated land- ownership arrangements by simplifying laws and procedures to divide land among heirs. This study is part of an ongoing Regional Working Paper Series sponsored by the Chief Econ- omist’s Offi ce in the Europe and Central Asia Region of the World Bank. It was fi nanced by the Europe and Central Asia Regional Studies Program. Johan Swinnen Public Disclosure Authorized Public Disclosure Authorized Liesbet Vranken Victoria Stanley Europe and Central Asia Region THE WORLD BANK Environmentally and Socially Sustainable Development Emerging Challenges of Land Rental Markets A Review of Available Evidence for the Europe and Central Asia Region March 2006 This volume is a product of the work of the staff of the International Bank for Reconstruction and Development and The World Bank. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of The World Bank of the governments they represent. The World Bank does not guarantee the accuracy of data included in this report. The boundaries, colors, denominations and other information shown on any map in this report do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Acknowledgments The main authors of the report are Johan Swinnen and Liesbet Vranken of the LICOS Center for Transition Economics at the University of Leuven, Belgium, and Victoria Stanley, ECSSD, of the World Bank. The team would like to thank Benoit Blarel, sector manager, ECSSD, for his useful comments and support. The report has benefited greatly from the comments and direction provided by the peer reviewers, John Bruce, Malcolm Childress, Klaus Deininger, Iain Shuker, and Wael Zakout. The team would also like to thank Bill Sutton, Gavin Adlington, and Cora Shaw for their useful comments, and Koshie Michel and Valencia Copeland for their assistance with formatting and editing. This report was financed as a regional study under the Chief Economist’s Office of the Europe and Central Asia Region, the World Bank. The team would like to thank Ali Mansoor and Willem van Eeghen for their guidance and support. TABLE OF ACRONYMS AWU - Annual Working Unit CEE - Central and Eastern Europe CF - Corporate Farm CIS - Commonwealth of Independent States ECA - Europe and Central Asia EU - European Union EU CAP - European Union Common Agriculture Policy FF - Family Farm FSU - Former Soviet Union GTZ - German Technical Cooperation Agency IF - Individual Farm IME - Institute for Market Economies LCU - Local Currency Unit OECD - Organization for Economic Cooperation and Development RFF - Registered Family Farm RH - Rural Household SAFER - Sociétés pour l’aménagement foncier et l’établissement rural UFF - Unregistered Family Farm UK - United Kingdom WB - The World Bank TABLE OF CONTENTS EXECUTIVE SUMMARY .................................................................................................................................. I 1. INTRODUCTION ............................................................................................................................................2 2. METHODOLOGY...........................................................................................................................................3 3. LAND RENTAL MARKETS: A CONCEPTUAL FRAMEWORK............................................................3 3.1 LAND SALES MARKETS ................................................................................................................................3 3.2 LAND RENTAL MARKETS..............................................................................................................................4 3.3 LAND RENTAL MARKETS IN OTHER REGIONS ..............................................................................................5 3.4 PATTERNS OF LAND RENTAL MARKETS IN ECA ..........................................................................................7 4. OWNERSHIP AND EXCHANGE OF LAND...............................................................................................8 4.1 LANDOWNERSHIP..........................................................................................................................................8 4.2 EXCHANGE: BUYING AND RENTING LAND....................................................................................................9 4.3 COMPLEMENTARITY OF RENTING AND BUYING LAND................................................................................12 4.4 FARM ORGANIZATION AND COUNTRY DIFFERENCES..................................................................................14 5. RENTAL CONTRACTS IN ECA.................................................................................................................17 5.1 VARIATIONS IN CONTRACTING ...................................................................................................................17 5.2 CAUSES OF VARIATIONS .............................................................................................................................18 6. CONSTRAINTS AND IMPERFECTIONS .................................................................................................19 6.1 PROBLEMS IN RENTING LAND.....................................................................................................................19 6.2 PROBLEMS IN BUYING LAND ......................................................................................................................20 6.3 CREDIT MARKETS AND PROFITABILITY ......................................................................................................21 6.4 MARKET POWER AND IMPERFECT COMPETITION........................................................................................22 6.5 LABOR MARKET CONSTRAINTS ..................................................................................................................26 7. EFFICIENCY AND EQUITY.......................................................................................................................28 7.1 IMPACT ON PRODUCTIVITY .........................................................................................................................28 7.2 IMPACT ON WELFARE .................................................................................................................................29 7.3 LAND ACCESS.............................................................................................................................................30 7.4 A TALE OF TWO RENTAL MARKETS ...........................................................................................................30 8. CONCLUSION...............................................................................................................................................31