Land reforms serve no purpose

More competition from corporate Pakistan will force the rural elite to corporatise or else be rendered obsolete.

Over the past month, the Muttahida Qaumi Movement (MQM) has presented a bill in the parliament proposing what would be the fourth round of land reforms legislation in the country’s history. This policy has been nothing short of an abject failure in the past and is highly unlikely to succeed this time around.

The ostensible objective of this policy is to create a more equitable distribution of wealth in rural Pakistan, thus aspiring to raise asset levels and incomes across the board. Yet, its recommendation rests on a flawed diagnosis of static rural incomes and thus proposes a solution that, far from creating a rural middle class, has only made the achievement of that goal even more difficult.

The existence of a landed rural aristocracy is not the cause of rural poverty, but a symptom of it. The real cause of rural poverty is low productivity of the labour force, which makes it impossible to economically justify anything beyond subsistence wages.

Rural wages and productivity

The relationship between productivity and wages is a well established one in economics, even if the underlying cause is often not quite well understood. Simply put, by contributing more towards profitability, more productive employees increase their value both to their employer and the market at large and can thus command higher wages.

Evidence of this is found all across the world. For example, Professor Akhand Hussain of the University of Newcastle in Australia wrote a paper in 2004 proving that there is a direct causal link between labour productivity and real wages appreciation amongst farmers in Bangladesh.

Professor Humayun Khan of the Agriculture University of Peshawar proved a similar link for farm wages in Khyber-Pakhtunkhwa (though he also lists education as a cause for the rise in productivity).

In other words, rural incomes are determined primarily by rises in productivity. But could land ownership provide a substitute for an increase in productivity? Could a farmer who owns his own land have a higher income even if he is not more productive? The answer, over the long run, is no.

Why land reforms fail

Land reforms in Pakistan have been tried by the administrations of Ayub Khan, Zulfikar Ali Bhutto and Ziaul Haq. The objective of each of these was to reduce the economic and political power of the rural landed aristocracy. The failure of these policies in doing so is self-evident.

The only thing that land reforms succeeded in doing was to render the integrity of rural land-ownership documents meaningless. On paper, the biggest landowners do not possess more than a few hundred acres.

Most of the rest is in the name of trusted tenants, with the aristocrats retaining effective control. This dilutes the legal protection of rural property rights and makes the rural elite even more powerful by ensuring that they are the sole arbiters of land disputes.

On the productivity front, however, Pakistan lags behind its regional competitors owing to the legal fragmentation of rural land due to the reforms. In essence, Pakistan has the worst of both worlds. The rural aristocracy is more powerful than ever but because the land is at least legally divided up into smaller farms, they have less access to credit and other capital, meaning that it is more difficult to raise the funds required to increase productivity.

The results stand before us: according to this year’s Economic Survey of Pakistan, compared with the world average, Pakistan is 21 per cent less efficient in wheat production, 27 per cent less efficient in sugarcane and 19 per cent less efficient in rice.

Possible solutions

To be against land reforms does not mean that one supports the socio-economic structures that exist in rural Pakistan today. It does, however, mean that one does not believe that giving people more land on paper makes them any better off.

Instead, agriculture must transform from a laidback lifestyle (the view of the rural elite) into a competitive commercial enterprise.

Rather than seeking to take away land from the existing rural elite, the government should encourage corporate entities to enter the market for food production. The MQM, in proposing the bill, spoke of encouraging this, but did not provide any specifics as to how it would be done.

There seem to be several companies that have already entered the fray, without government interference. JDW Sugar now owns its own sugarcane farms. Engro Corporation is expanding its in-house dairy farming capacity. Both of these are KSE-100 companies and can afford to raise capital and invest in improving productivity. Their employees are far better paid than the average agricultural worker in rural Pakistan.

More competition from corporate Pakistan will force the current rural elite to corporatise or else be rendered obsolete.

The writer is a financial and management consultant based in Karachi.

Published in The Express Tribune, November 1^st, 2010.