Land rental market reforms: Can they increase outmigration from agriculture? Evidence from a quantitative model

Abstract

Recent econometric work suggests that there is a positive link between the development of land rental markets and the migration of workers out of agriculture in the developing world. I investigate this claim using a two-sector model of structural transformation that takes into account the well-known inverse relationship between farm size and farm productivity. The model studies how the allocation of employment between agricultural and non-agricultural activities is affected by the presence of transaction costs in the land rental market, as well as by the initial distribution of land ownership. Theoretically, a reduction in transaction costs induces outmigration from agriculture if agricultural prices are sufficiently flexible, while rigid agricultural prices may lead to the reverse phenomenon of immigration in agriculture. Practically, the model predicts that for most of the countries tested, a reduction in transaction costs causes little labor movement between sectors. This is equally true concerning the effect of a land redistribution. In spite of this, these reforms are found to increase substantially the production efficiency and welfare of farmers. These results suggest that the main benefit of stimulating land rentals is not in fostering structural transformation, but in improving the livelihoods of farmers.