Agrarian reform law and the Coase Theorem

The author is dean and professor of the University of the Philippines School of Economics in Diliman, Quezon City.

There is a beautiful theorem in Economics called the “Coase Theorem” by
Nobel Prize winner Ronald Coase. It says that the redistribution of
assets for equity’s sake should not prejudice economic efficiency as
long as those assets can be traded in the market.

Comprehensive Agrarian Reform Law (CARL) was passed to redistribute
land from landowners to tenants. But it outlaws the market for land. It
thus violates the second part of Coase Theorem and puts equity squarely
at loggerheads with efficiency. The offending provision is Section 27,
which prohibits the sale, transfer or conveyance – apart from
inheritance of acquired lands – for 10 years. In practice, even beyond
10 years, legal land transactions are still prohibited until the land
has been fully repaid by beneficiaries.


The correct CARL should pursue the long-run well-being of beneficiaries
and a sustainable equitable asset distribution, which is the substance
of the policy; not just short-term ownership of a land title, which is
only its instrument. Without the land market, the instrument does not
conduit to and may even sabotage the substance. Poverty is poverty
whether a person is a title holder, a tenant or a share-cropper. It
will fan hopelessness and insurgency. And precisely because of the lack
of reasonably priced credit, the beneficiaries not only fail the test
of the substance but may slowly lose the very instrument, i.e., the
effective ownership of the land passes to non-title holders. Section 27
is incompatible with CARL’s goals over the long run.

Rural Land Market

If Section 27 is amended to allow the sale, usufruct or mortgage of
awarded lands to juridical persons, this would result in (a) land
prices being revealed, (b) emancipation patents (EP) and certificates
of land tranfer (CLT) can then be priced and be used as collateral.
Furthermore, (c) banks or lenders who foreclose should be legally
allowed to own more land than the CARL limit. These will restore the
legal rural land market and, thus, the formal rural credit market.

Senate Bill 167 – together with Senate Bill 168 (authored by Sen.
Sergio Osmena III) – is the closest to this ideal. It correctly resorts
to a revived rural credit market for long-run sustainability of CARL
goals. Senate Bill 2473 (by Sen. Ralph Recto) correctly recognizes the
problem, points out the futility of the Agri-Agra Law but is weak on
default procedure. Senate Bill 1666 (Sen. Juan Flavier) also recognizes
the credit constraint problem and in response makes the Land Bank of
the Philippines (Landbank) the guarantor of the mortgage to banks and
other lenders, which means that the state treasury ultimately bears the

House Bill 5511 makes Quedan Guarantee Corp. and Landbank the
guarantors of the mortgage from a state-provided fund of P5 billion.

The problem with the latter two bills is that (a) the government,
expected to fork more, is perennially finance-challenged, (b) these
government-dependent default procedures do not help restore the rural
land and credit markets, which ensure long-term sustainability and (c)
they may create moral hazard by eroding lender prudence if government
promptly delivers or sap lender commitment if government does not. The
betting is that government will not deliver beyond promises.

On the other hand, both Senate Bill 1666 and House Bill 5511 leave room
for the control of land reconsolidation by reassignment of land only to
CARL-qualified beneficiaries.

We feel that the land recon-solidation issue can be mitigated without
the State being guarantor. Together, Senate bills 167 and 168 promise
real rather than cosmetic change and are worthy of support but still
need improvement on this issue.

Progressive Taxation

Consolidation of land asset occurs over the long-run if the effective
cost of holding on to larger and larger land is so far below the
economic and political benefits. To tip the balance:

(a) A progressive tax on land should be adopted based on hectarage and
prohibitive beyond, say, 500 hectares: from 0% x market value per
hectare for farms from 1-3 hectares, say, to 20% x market value per
hectare for farms of 500+ hectares. This has many advantages of which
are: (i) a market-proxy value revealed by DAR acquisition record, (ii)
large and especially idle landholdings will be very costly to maintain
and (iii) it will help solve the fiscal deficit of the government.

This progressive land tax will take the place of a second-round CARL
application unless the consolidating owners themselves undertake a
voluntary offer to sell (VOS) or Voluntary Land Transfer (VLT). (iii)
Thus, CARL effectively becomes a two-part program: Part one is the old
CARL as we know it, without or with an amended Section 27; Part two is
VOS or VLT with progressive land tax. This “new” CARL is
efficiency-compatible and an improvement over both the state-sponsored
and the purely market-based land reform.

Part of the progressive tax proceed should accrue to LBP to finance CARL acquisition and services.

(b) The sale of CARL-awarded land may be subjected to a graduated
capital gains tax (higher in earlier years) whose proceeds will all
accrue to Landbank to finance CARL-related services. Rancor among
former owners and even other less-fortunate beneficiaries simmers when
an “underground” sale nets a beneficiary millions. The way out is to
bring the sale above ground and hit it with a capital gains tax whose
proceeds goes back to Landbank to target CARL services. A capital gains
tax is not anti-efficiency nor anti-market.

(c) A conversion tax is imposed if agricultural lands are converted to industrial/commercial use.


It is hardly helpful to say that CARL has fallen very short because the
government has not delivered adequate support services. An agrarian
reform law that is incompatible with economic efficiency quickly
becomes a fiscal black hole. The reality is that state support to CARL
will always fall short just as it falls short for education and other
pressing concerns. We should look for remedies some other place. The
challenge is to make the paltry adequate.

Land reforms’ goal of more equitable land asset distribution is worth
pursuing. There is also some evidence that long-term economic growth
performance improves with a more equitable asset distribution.
Unfortunately, CARL – as an instrument of land reform – has been
rendered counterproductive.

The outlawing of the land market in the rural economy has rendered CARL
subversive of its own worthy political goals and in places may have
spawned a new under-class called the “landed poor.”

It is time to make CARL serve both long-term equity and economic
efficiency. This will help support the prosperity of the rural area.

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