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Workers Unite: Cooperative Property Rights and Development in El Salvador - Guest post by Eduardo Montero

This is the eleventh entry in this year's job market series. You can read the previous entries here.

"On March 5th, we went to sleep as poor colonos [laborers]. On March 6th, we woke up rich, as landholders."  –Cooperative Member, La Maroma Cooperative, 2017

Cooperative Property Rights in Latin America

Latin America has high levels of land inequality. In fact, land inequality is frequently cited as a key driver of Latin America’s comparative underdevelopment. In response to these high levels of inequality, over half of Latin American countries have attempted land reform programs to transform haciendas, in which an owner contracts laborers to work on the land, into agricultural cooperatives, in which workers jointly own and manage production. The figure below illustrates the Latin American countries that have attempted a land reform since the 1920s.
 

 


Despite the widespread prevalence of land reforms to create cooperative property rights systems, there is no causal evidence on the effects of cooperative property rights on agricultural productivity or development (see Pencavel, 2013, for a review). The main empirical challenge when studying the impacts of cooperative property rights relative to outside ownership is that property rights arrangements are not randomly assigned. Generally, the choice of property right system reflects the underlying characteristics of the land or the landowners, such as geography, capital requirements, or cultural practices. These characteristics may also affect outcomes such as productivity. This means that one cannot compare cooperatives to non-cooperatives to identify the impacts of cooperative property rights. This empirical challenge has left a gap in the research on the implications of cooperative ownership relative to outside ownership

El Salvador’s Land Reform

In my job market paper, I use a unique feature of a land reform program from El Salvador in 1980 to provide the causal impacts of cooperative property rights on agricultural productivity, crop choices, and economic development. Prior to the land reform, almost all of El Salvador’s agricultural production was organized in the form of haciendas. In fact, an estimated 1 percent of landholders owned over half of El Salvador’s agricultural land. As a result of the land reform, properties belonging to individuals with cumulative landholdings over 500 hectares (ha) were reorganized into cooperatives to be owned and managed by the former hacienda workers. However, properties belonging to individuals with cumulative land holdings under 500 hectares remained as privately-owned haciendas.

The El Salvador land reform had two important features that provide discontinuous variation in the probability of cooperative formation that I use to identify the impacts of cooperative property rights on economic outcomes. First, the cumulative ownership threshold of 500 ha creates a set of similar properties, some of which happen to be owned by someone with more than 500 ha in total holdings and were therefore reorganized into cooperatives, and some which were owned by someone with cumulative holdings just below the threshold and therefore were not reorganized into cooperatives. The second key feature of the land reform is that the military executed the reform swiftly and took multiple steps to ensure its secrecy prior to its implementation. This prevented large landholders from being able to selectively adjust their cumulative landholdings to avoid expropriation prior to the implementation of the reform.

Cooperative Property Rights, Agricultural Productivity, and Income

I use the 500 ha threshold rule from El Salvador’s land reform law and a regression discontinuity (RD) design comparing properties that were reorganized into cooperatives to similar properties that were not reorganized into cooperatives to estimate the economic impacts of cooperative property rights relative to the private ownership system haciendas.

Using data from El Salvador’s 2007 census of agriculture, I find several key results related to agricultural productivity. First, relative to haciendas cooperatives devote less land to cash crops, such as sugar cane and coffee, and are less productive at cash crops. However, this is not the case for staple crops, such as maize and beans. Cooperatives devote more land to produce staple crops and are actually more productive at these crops relative to haciendas. Interestingly, I find no evidence that cooperatives are on aggregate less productive than haciendas.  By this I mean that cooperatives and haciendas have similar levels of revenues and profits per hectare.


 
These results are consistent with a property rights model of agricultural cooperatives, in which cooperative voters choose to redistribute cash crop earnings, which therefore reduces the cooperative’s productivity in the production of cash crops. In the model and in focus group discussions with cooperative members, because workers can consume staple crops directly if their output is taxed, staple crops are not subject to this redistribution. As a result, cooperatives are more likely to focus on staple crop production and are more efficient than haciendas at producing staple crops.

Finally, I examine the impacts of cooperative property rights on worker incomes and inequality at the worker level to understand the equity implications of cooperative property rights. The income distributions for cooperative members are more equitable and have higher means compared to the income distributions of workers on haciendas. This suggests that while the cooperative property rights have important additional impacts on equity and worker incomes.

Conclusion

The key implications of the paper are as follows. First, despite the strong priors economists may have that private property rights are evidently more efficient than cooperative property rights, this paper presents causal empirical evidence and a model comparing cooperative property rights to private ownership that suggests that this is not necessarily the case. Second, there are no differences in aggregate productivity between cooperatives and haciendas, yet workers on cooperatives have less income inequality and on average higher incomes.

The results in this paper speak to a modern policy question in Central America today, where there has been renewed interest in exploring “cooperative development” in the last few years. In fact, the UN declared the year 2012 as the “International Year of Cooperatives”. Additionally, this paper provides important evidence on the long-run impacts of land reforms that reorganized firms from outside ownership. The results are encouraging: they suggest that land reforms that give workers a stake in the production may benefit workers and development.

Eduardo Montero is a PhD student at Harvard University.