Land in Transition: Reform and Poverty in Rural Vietnam

CHAPTER 1

Introduction

The policy reforms called for in the transition from a socialist command economy to a developing market economy bring both opportunities and risks to a country’s citizens. In poor economies, the initial focus of reform efforts is naturally the rural sector, which is where one finds the bulk of the population and almost all the poor. Economic development will typically entail moving many rural households out of farming into more remunerative (urban and rural) nonfarm activities. Reforms that shift the rural economy from the relatively rigid, control-based farming institutions found under socialist agriculture to a more flexible, market-based model in which production incentives are strong can thus play an important role in the process of economic growth.¹ However, such reforms present a major challenge to policy makers, who are concerned that they will generate socially unacceptable inequalities in land and other dimensions relevant to people’s living standards.

The two largest transition economies of East Asia, China and Vietnam, undertook truly major institutional reforms to their rural economies in the 1980s and 1990s. Both countries saw rapid poverty reduction in the wake of those reforms. In Vietnam, the poverty rate fell from 57 percent to 20 percent over the period 1993 to 2004 (World Bank 2005).² In China, the poverty rate fell from 53 percent in 1981 (only shortly after reforms began) to 22 percent in 1991 and 8 percent in 2001 (Ravallion and Chen 2007). Rural economic growth has been the main driving force in poverty reduction in both countries.³ Of course, simply observing that poverty incidence fell following reforms does not tell us that those reforms were the reason. Many other things were happening at the same time in both economies. The role agrarian reforms played in the success of these countries against poverty remains far from clear.

This book studies how the changes in land institutions and land allocation required for Vietnam’s agrarian transition affected people’s living standards—notably that of the country’s rural poor. Living standards means household command over commodities, as measured by consumption. (The terms welfare and living standards are used interchangeably.) The rest of this chapter first reviews the specific issues at stake and then provides an overview of the book’s contents.

The Issues

In less than one lifetime, China and Vietnam radically reformed their rural economies, first collectivizing agriculture and then decollectivizing it. This book is concerned with the welfare impacts of Vietnam’s rural land reforms from decollectivization on, although it comments at times on similarities and dissimilarities with China.

After Vietnam’s victory against the French in the War of Independence in 1954, land reform and redistribution figured prominently in the agendas of Vietnam’s leaders in both the North and the South. North Vietnam initially redistributed agricultural land in what appears to have been (according to the historical record) a relatively equitable manner across households. But this situation of a relatively equitable family farm economy did not last long. The collectivization of farming came in the late 1950s in the country’s North. Multiple land reform and redistribution programs were also pursued in the South, often at cross-purposes, both prepartition and postpartition, as well as during the war with the United States. The end result appears to have been uneven geographically within the South, with tenants and poor farmers gaining in some localities and large landlords maintaining the upper hand in others. At the country’s reunification in 1975, some redistribution of large land-holdings was implemented before attempts were made to also collectivize the South. Yet only 11 years later and three decades after collectivization began in the North, Vietnamese policy makers had come to the view that, by and large, collectivized farming was inefficient, and so the pendulum swung back to family farming.

The switch from a socialist control economy to a regulated market economy officially began with the Doi Moi (renovation) program of 1986.⁴ Two years later, the government introduced the 1988 Land Law, which mandated the breakup of the agricultural collectives—nearly 10 years after China’s decollectivization.⁵ It was the first major step in agrarian reform, namely, to transfer decision-making powers over farm inputs and outputs to households and to free up input and output markets.

This entailed what was surely one of the most radical land reforms in modern times. The bulk (80 to 85 percent) of the country’s agricultural land area was scheduled for effective privatization over a relatively short period. Initially, the collectives and local cadres still set production quotas and allocated land across households for fixed periods; households were not free to transfer, exchange, or sell their allocated land, but they did become the residual claimants on all output in excess of the contracted quotas. Those farmers with a surplus were free to sell their output at market prices. This reform was similar to China’s household responsibility system introduced in the late 1970s.⁶ Soon after, however, Vietnam took the further step of abandoning the production quotas (in 1989, a number of years before China took this step) and allowing a private market in agricultural output. In a matter of only a few years, Vietnam had gone from a highly controlled collective-farming system to the type of free-market economy in farm outputs found in nonsocialist economies.

While much has been written about these agrarian reforms in both China and Vietnam, the literature tells very little about the welfare distributional impacts of these truly major economic changes. In the case of China, Fan (1991) and Lin (1992) have argued that by linking rewards to effort and thus improving farmers’ incentives, China’s decollectivization significantly enhanced agricultural productivity. However, as for Vietnam, the literature for China has not assessed the welfare distributional outcomes of the assignment of land-use rights at decollectivization. Could higher efficiency gains have been achieved with some other allocation? What would the implications have been for equity?

Subsequent poverty reduction depended crucially on the success of this first stage of agrarian reform. A highly unequal postreform allocation of land assets would have risked jeopardizing prospects of higher agricultural outputs for key crops (where scale economies in marketing and distribution are minimal, such as rice), and it would also have meant that the growth that did occur had less impact on poverty than it could have. Naturally, when the poor have a small share of the aggregate land available, they tend to have a small share in the aggregate output gains over time.⁷ At the other extreme, a highly equal allocation—that ignores the differing productive capabilities of households—might well have jeopardized economic efficiency to the point of famine. With its food shortages and low productivity, Vietnam under collectivization is itself a telling example of the huge social costs that excessive emphasis on equality can bring.

The classic economic arguments in favor of redistributive land reform in market economies are based on the proposition that market imperfections entail that large farms use too little labor relative to capital, while the reverse is true for small farms.⁸ In a market economy setting, the resistance of rural landlords with large holdings is the main impediment to achieving efficiency-enhancing redistributive land reforms.

This model is clearly not applicable to either China or Vietnam at the time of their decollectivization. In their case, the role of the landlords was essentially played by the local cadres who ran the collectives and stood to lose from the reform. The central governments of both countries had little choice but to decentralize the process of decollectivization and land allocation to households, assigning responsibility to the commune level. The center could not control the local commune authorities, who were (naturally) much better informed about local conditions. With high costs of acquiring the information needed to control land assignment locally—recognizing that local agents may well have little sympathy for the center’s aims—the center faced an accountability problem in this decentralized reform.⁹Malarney (1997: 900) describes well the problem faced by the reformers:

[G]iven the institutional dominance of the Communist Party, local politicians with party backgrounds, which is to say all, are compelled by the party to be impartial and committed to official policies; yet, as politicians drawn from local kin and community, they are also pressured to nurture interpersonal relations, selectively avoid official dictates, and use their positions to bring advantages to kin and/or co-residents.

The cooperation of local cadres was thus essential if the reform was to succeed. In principle, the outcomes from this decentralized reform could range from an equitable allocation of land (at least within communes) to a highly inequitable allocation that favored the cadres and their friends and families.

It is now well known that agricultural productivity increased appreciably on switching back to the family farm model. After decades of decline, or at best stagnation, food-grain availability per capita started to rise on a persistent trend after 1988 (see, for example, Akram-Lodhi 2004, 2005: figure 1). Breaking up the collectives and returning to family farming quickly put an end to Vietnam’s food crisis. However, given the poor incentives for production in the collective system, it is likely that almost any assignment of land would have increased aggregate output. Indeed, outcomes under the collectives are not a particularly interesting counterfactual for judging the performance of Vietnam’s decollectivization. Instead, we ask: Did this reform bring Vietnam closer to the equitable allocation of land across households that had been aimed for under the redistributive land reforms introduced immediately after the War of Independence? If so, did this allocation come at a large cost to aggregate efficiency when judged relative to a competitive market in land?

Agrarian policies in China and Vietnam diverged from the late 1980s. Decollectivization had not initially been accompanied by the introduction of a free market in land in either country. Indeed, in China, the cadres and collectives have largely retained their powers in setting quotas and allocating (and reallocating) land.¹⁰ There have been concerns about the efficiency costs of China’s nonmarket land allocation (see, for example, Brümmer, Glauben, and Lu 2006; Carter and Estrin 2001; Jacoby, Li, and Rozelle 2002; Li, Rozelle, and Brandt 1998). While freeing up land markets is expected to promote economic efficiency, policy makers have worried that it would undo socialism by re-creating a rural proletariat—a class of poor rural workers. This concern has inhibited liberalizing agricultural land markets in China, despite the likely efficiency gains.

By contrast, Vietnam embarked on this seemingly risky second stage of land reform and established de facto private ownership of agricultural land. Five years after the first set of reforms in 1988—whereby agriculture in Vietnam was decollectivized, land was allocated to households by administrative means, and output markets were liberalized—legal reforms were undertaken to support the emergence of a land market. The 1993 Land Law introduced official land titles and permitted land transactions for the first time since communist rule began. Land remained the property of the state, but usage rights could be legally transferred, exchanged, mortgaged, and inherited. A further (much debated) resolution in 1998 removed restrictions on the size of landholdings and on the hiring of agricultural labor.

Economic efficiency was clearly the primary objective of these reforms. Without a market mechanism to guide the land allocation process at the time of decollectivization, inefficiencies in the allocation of land could be expected, with some households having too much land relative to an efficient allocation and some having too little. In response to those inefficiencies, the second stage of Vietnam’s agrarian transition entailed reforming land laws to create the institutional framework for a free market in agricultural land-use rights. Having removed legal obstacles to buying and selling land-use rights, the government expected that land would be reallocated to eliminate the initial inefficiencies in the administrative assignment achieved at decollectivization.

Freeing up agricultural land markets was a risky reform. The outcomes are far from obvious on a priori grounds. Land was clearly not the only input for which the market was missing or imperfect. As a stylized fact, other factor markets were still poorly developed, which was likely to limit the efficiency gains from freeing up land transactions alone. Pervasive market failures fueled by imperfect information and high transaction costs could well have stalled the process of efficiency-enhancing land reallocations during the transition. And there have been concerns about the possibilities of rising inequity in the wake of these reforms. Since these reforms, there have been signs of sharply rising rural landlessness, which have fueled much debate about the wisdom of Vietnam’s reforms.

The outcomes of this second stage of land reform in Vietnam are clearly of interest to China. Although China has not followed Vietnam in liberalizing the exchange of agricultural land-use rights, the issue has been much debated within China at the highest levels of policy making.¹¹ As in Vietnam, proponents of a greater reliance on markets in rural land allocation hope that land will then be reallocated to more efficient users and that inefficient farmers will switch to (rural or urban) nonfarm activities. And, as in Vietnam, there are concerns in China that local officials and elites will subvert the process and that the gains from a market will be unfairly distributed among farmers, with some becoming, in due course, landless and impoverished.

The local state has continued to play an active role during the agrarian transition in Vietnam after the legal changes needed to allow a free market in land-use rights. It is an open question whether the continuing exercise of communal control over land has been synergistic with the new market forces or opposed to them. Possibly the local political economy operated to encourage otherwise sluggish land reallocation to more efficient users.¹² Or it may have worked against an efficient agrarian transition, given risk-market failures and limitations on the set of redistributive instruments. Resistance to the transition on the part of local cadres may then be interpreted as a form of social protection, recognizing the welfare risks that a free market in land entails. Or one might argue that the frictions to the agrarian transition stemming from the local political economy worked against both greater equity and efficiency; while socialism may have left ingrained preferences for distributive justice, the new possibilities for capture by budding local elites—well connected to the local state authorities—presumably would not have gone unnoticed.

Assessing the welfare impacts of such an economywide reform is never going to be easy. The first step is to be clear on the objective against which success is to be judged. We take the primary objective of the reforms in this setting to be raising absolute levels of living, as reflected in command over commodities. When an assumption is needed about what trade-offs are allowed between welfare gains at different initial levels of living, we assume that highest weight is given to gains for the poorest, as reflected (for example) in a standard measure of absolute poverty.¹³ Note that this characterization of the objectives of policy does not attach a value to equity independent of the measured level of poverty, but a reform’s impacts on poverty will depend on both its efficiency and its equity impacts. In essence, the impact on poverty defines the equity-efficiency trade-off one is willing to accept. While the impact on the absolute levels of living of the poor is taken to be the main measure of success, we also acknowledge the heterogeneity in impacts of these reforms, which can have both losers and gainers at any given level of preintervention welfare.

But how is performance against that objective to be assessed? One does not have the enormous informational advantage of being able to observe nonparticipants in the reform at the same time as one observes participants. The lack of a comparison group means that one must rely more heavily on economic theory to infer the counter-factual of what the economy would have looked like without the institutional changes of interest and to assess which types of households are likely to gain and which are likely to lose. While we have little choice but to use methods of analysis that make many assumptions about how the economy works, we want the assumptions made to be explicit and tailored to the specifics of the setting. We offer a set of methods for this purpose, drawing on the tool kit of theories and empirical methods of modern economics. By providing a set of tools and case studies in their application, we hope that this book will help stimulate future efforts in the counterfactual analysis of the poverty impacts of economywide reforms and structural changes.

Guide to the Book

Chapter 2 begins with an overview of the historical context for our study and a review of the ongoing debates on land markets in Vietnam and elsewhere in East Asia. Chapter 3 then discusses our data, primarily drawn from four nationally representative household surveys spanning the period 1993 to 2004. That chapter also provides some key summary statistics, calculated using those data, on the changes in poverty, inequality, and landlessness over time, which we return to often later in the volume.

Turning to the reforms, chapter 4 offers an assessment of the welfare distributional outcomes, from both an efficiency and an equity perspective, of the assignment of land-use rights achieved by Vietnam’s decollectivization following the 1988 Land Law. We model the actual allocation of land at decollectivization using a theoretical model that is capable of encompassing a potentially wide spectrum of objectives for local administrators, ranging from benevolent egalitarianism to a corrupt self-interest. We then use a micro model of farm-household consumption conditional on the land allocation to simulate the impacts of alternative counterfactual allocations, holding other factors, such as the agricultural terms of trade and the joint distribution of nonland endowments such as human capital, constant.

We use two counterfactuals. One is an equal allocation of (quality-adjusted) land per capita; this is of interest as one possible equity benchmark for assessing the actual allocation. The other counterfactual is the allocation that would have maximized the commune’s aggregate consumption, as would have been achieved by a competitive market-based privatization under ideal conditions. This is our efficiency benchmark. We do not claim that a competitive market was a feasible option at the time in Vietnam. Indeed, agricultural land markets were virtually nonexistent. Other markets (notably for credit) and institutions (for property rights enforcement) were probably not functioning well enough to ensure an efficient market-based privatization of land. However, a reasonably close approximation to the market allocation might still have been in reach by nonmarket means. Very little mobility of households had been allowed up to this time; so people may have been well enough informed within each village to know if one family attached an appreciably higher value to extra land than another, even though a market did not exist. The competitive market allocation is then an interesting benchmark. Comparing this with the actual allocation allows us to estimate the implicit value that was placed on efficiency versus distributional goals in the initial allocation of the collectives’ land to households. We can also characterize the specific distributional outcomes of the realized land allocation; possibly efficiency was sacrificed, but the poor would have been better off if it had not been.

Chapter 4 shows that the first stage of Vietnam’s agrarian reform was done in a relatively equitable way—giving everyone within the commune roughly the same irrigated-land equivalent on average. Thus, we show that Vietnam started its reform period with the kind of egalitarian land reform often advocated for developing countries.¹⁴ Of course, many sources of inequality remained. Despite land’s being relatively equitably distributed within most communes, there were communes in which it was not distributed equitably. Furthermore, there was no mechanism for redistribution between communes; there was little geographic mobility within rural areas (although this appears to have increased over time, notably in the South). Inequalities remained in other (nonland) dimensions. Access to farm capital was probably more unequally distributed than land or labor inputs. Inefficiencies also remained. We show that after decollectivization, some households ended up with more land than they would have had in a competitive market allocation, while others had less.

Next, chapter 5 assesses whether the subsequent reallocations of annual agricultural land-use rights redressed the inefficiencies of the initial administrative allocation of land resulting from the 1988 Land Law. Using a panel of farm households spanning the change in land laws