Land Reform in Venezuela -- Developmental Economics Analysis on Property Rights, Part A
Introduction
In Venezuela, the discovery of oil was an excitement for the fast and easy track it paved to wealth. Venezuela’s agricultural industry, on the other hand, was largely neglected due to over-emphasis on the oil industry. Such a tilted policy design deepened the tremendous gap between rural and urban areas, with only 12% of its population living in the rural area who produces food insufficient for the whole nation (Wilpert, 2007). Nevertheless, the greater demand for food did not fuel the welfare of the most fundamental supplier group – the farmers. Instead, it filled up the pocket of the elite class, the latifundista, as they had overwhelming property control over the key resources. Misallocation of property rights not only hinders the production power of the traditional farming class, it also causes a vicious cycle where incentives for relevant activities are nowhere to be found.
Given the dreadful situation, Venezuela’s aggressive land reform is looking to address the persistent ill-distribution of property rights. It is a state-led sweeping force that spurs massive destruction of existing property rights followed by extensive redistribution. For such a ferocious reconstruction of social structure, three general but central aspects to be examined are: its context, plan, and results. We will study its context to understand the motivation behind the social change. We will also investigate its plan to understand the policies and their implications. Lastly, we will explain and learn from the results critically.
This series, constituting Part A and B, will be structured respectively to the three key goals. Part A will cover the “Context and Motivation” discussion. Part B will be focusing on the “Policies and Implications” and “Results and Lessons”. Analyses in this series will be taking an angle of developmental economics theories that focuses on property rights, with a touch of entrepreneurship theory. By overlaying academia endeavor with Venezuela’s practical struggle, this paper aims to reveal the central role of property rights in Venezuela land reform.
Context and Motivation
To understand the call for land reform in Venezuela from an angle of property rights, one must first identify the exact property rights that are critical to the matter. First and foremost, arable land by itself is the most obvious and inseparable element, for no agricultural activity can be carried out without a base of arable land. Therefore, the ownership of land is a property right that appears on the top of our list. However, arable land, standing alone, is not sufficient for agricultural production. Human labor is another distinctive and irreplaceable input in the process. It can only be directed to the land under the condition where property right of utilization is possessed by the labor contributor. The uniqueness and necessity decide that property right of utilization must be distinguished from the property right of ownership (Ostrom & Hess, 2007).
Another two property rights that must be included are the right of exclusion and alienation (Ostrom & Hess, 2007). Landless farmers need access to land resources for production. Such right of access is an essential complement to the right of utilization. Thus, we care about who, if any, holds the right of exclusion. Moreover, in the under-developed rural framework of Venezuela, cumbersome farming work usually requires people to work together, leading to a concern of the natural complexity of cooperation. Only with a lucid right of exclusion, the complexity can be managed. The right of alienation is also important because it is the basis for mobilization of property value. The mobility allows the property to be a source of credit, unleashing the “capital” potential of the assets which is extremely precious and powerful for Venezuela’s rural development (De Soto, 2000).
Beyond the property rights on the land itself, we must consider the property rights on the products from agricultural activities. Among which, right of possession and alienation are the most influential ones to the welfare of Venezuela farmers and the health of the industry. In other words, we must assess the level of control that farmers have over the ownership and the transactional value of their output.
After identifying the key property rights, we then shift our focus to their distribution. As a matter of fact, "75% of the country's private agricultural land is owned by only 5% of the landowners, while 75% of the smaller landowners own only 6% of the land" (Wilpert, 2007). Such a drastic contrast in number presents the dire imbalance in property right of ownership between the latifundista and farmers, causing most production resources in the hand of non-producers. However, a plain big difference in ownership may not be a death penalty. What is more devastating is the fact that, in Venezuela, legal claim on the property was virtually encompassing with no consideration of the distinctions between property rights of ownership and the rest of critical economic property rights (Howard-Hassmann, 2015). Hence, excessive control of latifundista left the landless farmer with almost no rights at all over the arable land that they depend on.
Thus, not having proprietorship meant not having the right of utilization, which resulted in a series of problems. It increased future uncertainty and reduced investment incentives of farmers. It also imposed extra cost to production as farmers needed to rent the right of utilization, which was usually priced too high for a possible margin. It also led to sizable inefficiency for the society because it was hard for the two main inputs, farmers’ labor and arable lands, to come together. As a result, many of the lands remained idle and the national shortage of food supply was enlarged.
Property right of exclusion was also in pure control of the latifundista in Venezuela. They were free to decide on exclusion or inclusion. Therefore, farmers were facing high uncertainty for being excluded at any point in the future, which was a significant discouragement. It also made cooperatives harder to form as there was no clear rule that instructs an order. The property right of alienation was nowhere near the reach of most Venezuela farmers. Naturally, they had no means to mobilize their property value, if there was any. Naturally, farmers had minimum credit capacity and they found themselves endlessly stuck in the mud with no sign of expansionary opportunity.
Venezuela farmers had no primary right or control even to the output they produced with their own sweat and blood. In the research of McKay, a farmer from Rio Tocuyo named Carmen Tula, said that farmers only received one tenth of the amount that consumers paid to private intermediaries (McKay, 2012). These intermediaries were also owned by the elite class, yielding extreme power over pricing. They acted in an oligopolistic fashion to collectively discriminate against farmers. Arguably, farmers’ property right of possession and alienation were not legally deprived. However, these two critical rights were indeed factually truncated by the outside forces. For nondiscriminatory preservation of such rights, economic consequences of farmers’ work should be gauged upon an equivalent consideration of their contribution, which is undoubtedly significant. Latifundista eroded the fair interest of farmers, leaving them with an inequitable return.
From Kirzner’s single period model, entrepreneurs are price adjusters who identify price discrepancies and bridge the gap by arbitrage (Kirzner, 1985). However, arbitrageurs failed in Venezuela since the market was not free but systematically distorted. This is just a simple illustration of the fact that, in an economy that has substantial institutional flaws, low-level and short-run entrepreneurship can hardly emerge or make an influence. Fundamental corrections, namely high-level and long-run institutional innovations, are needed. Thus, by including entrepreneurship into discussion, a national effort in land reform now has extra substance.
Conclusion of Part A
This series commenced with addressing the motivation behind the Venezuela land reform by breaking down the property right bundle of arable land and discussing distribution in its state before the reform. We distinguished property rights of ownership, utilization, exclusion, alienation of arable land, and property rights of ownership, alienation of farmer’s economic products. Then we illustrated the importance of each and how ill-distributed property rights hurt Venezuelan farmers. We also presented the failure of private entrepreneurship in an institutional environment that has been systematically distorted, which contributed to the urgency of institutional innovation that is an entrepreneurship effort at the state level.
Bibliography
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Kirzner, I. M. (1985). The Entrepreneurial Process. In Discovery and the capitalist process (pp. 68-92). Chicago: University of Chicago Press.
McKay, B. M. (2012). Agrarian reform under Chavez: Assessing the impacts of Venezuela's state-led agrarian reform programme on rural livelihoods. Saarbrücken, Germany: LAP LAMBERT Academic Publishing.
Ostrom, E., & Hess, C. (2007). Private and common property rights. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1936062
Soto, H. D. (2000). The mystery of capital. In The mystery of capital: Why capitalism triumphs in the West and fails everywhere else. London: BANTAM.
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