Tenancy and interlocking markets: issues and some evidence

World Development, Printed in Great

Vol.

16, No. 6. pp. 65-6.

1988.

0305-750x/88 $3.00 + 0.00 0 19% Pergamon Press plc

Britain.

Tenancy

and Interlocking

Markets:

Issues and Some Evidence M. A. TASLIM* Australian National University, Canberra, Australia Summary. - It is frequently asserted that the land lease markets in agrarian economies tend to be interlocked with other markets. In recent years a number of theoretical models have been constructed to explain and analyze interlinkages of various markets under cropshare tenancy. However. the empirical basis for such assertions remains very weak. This paper reviews the issues discussed in the literature and attempts empirical verification in the specific context of agriculture of Bangladesh. The evidence presented does not reveal any significant interlinkages of rural markets in Bangladesh.

1.

This

INTRODUCTION

locking

recent

In that

rural

cropshare

years

many

authors

markets

tend

tenancy.

Markets

have

to be interlocked

is devoted

markets

under

to a discussion cropshare

of inter-

tenancy.

A

of the issues is given in Section 2. Empirical evidence is invoked in Section 3 to test the validity of various presumptions and hypotheses regarding interlinked transactions in the specific context of the agriculture of Bangladesh. It is found that the evidence does not lend any credence to the claim that rural markets tend to be interlinked. Some concluding remarks are presented in Section 4. general

asserted under

are said to be inter-

if transactions in one market (viz.. credit) between two parties are contingent upon transactions in another market (rviz.. land lease) between the same two parties. There may be two types of interlinkages: coercive and voluntary. A coercive interlinkage occurs when the dominant party imposes its conditions on the weaker party by resorting to socio-political or extra-economic coercive measures: a landlord may force his tenants to spend a part of their time working on his land without any payments. Contrary to this, a voluntary interlinkage is one where both parties have an economic incentive to adopt or accept such interlinkages. For example, a landlord may offer credit to his otherwise not creditworthy tenants who may welcome such an offer. Much of the literature is concerned with the latter type of interlinkages. It has been shown by a number of authors (see below) that the presence of such interlinkages may significantly alter the equilibrium conditions in the rural markets. If a particular interlinkage is profitable to the landlord, which it must be for him to adopt it, it may be in his interest to perpetuate the situation which makes the interlinkage desirable to the tenants. Thus a landlord may consciously inhibit technical progress in agriculture to keep his tenants perpetually impoverished so that they always acquiesce to interlinked credit and tenancy transactions.

paper

locked

review

2.

A REVIEW

OF

ISSUES

It has been asserted by a number of authors that the land lease markets in less developed agrarian economies tend to be interlocked with other markets.’ A number of reasons for such interlocking of markets have been advanced: l Exploitative landlords interlock land lease and credit markets in order to extract maximum surplus from their tenants and keep them in perpetual bondage of indebtedness (Bhaduri, 1973; 1977). l If the landlords can force the tenants to their “reservation utility” level through variations in plot size, it is in the interest of the landlords to ensure that the tenants get credit from the

‘The author wishes to express his sincere gratitude to B. Hazari and S. Rashid for their kind help and La Trobe University and University of Dhaka for financial and other help. The comments from an anonymous referee were very useful in revising this paper. 655

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cheapest source, and in the event the landlords are the source of the cheapest credit, it is done by interlinking tenancy and credit contracts (Braverman and Srinivasan. 19Sl). l Interlinking of land. labor and credit markets is an attempt to improve allocative efficiency in the presence of costly monitoring and moral hazard problems in less developed agrarian economies where most contingent markets have not developed (Bardhan. 1980; Braverman and Stiglitz, 19S2; Mitra, 1983). l When the tenant’s effort is not observable and borrowing elicits more effort on cropshare land. the landlords can increase their income by interlinking tenancy and credit contracts (Braverman and Stiglitz, 1952; Mitra, 1983). l The need for availability of labor at the right time and in the right quantity may induce landlords to tie up land, credit and labor market contracts (Bardhan, 1980). l If legal, social and moral norms put arbitrary restrictions on certain contractual terms. e.g., crop share, landlords may resort to interlinking transactions in different markets to get around the effect of such restrictions (Bhaduri. 1973; Bardhan, 1980: Braverman and Srinivasan, 1981; Braverman and Stiglitz, 1982; Mitra. 1983). l Interlinking of tenancy and production loan contracts serves the landlords as a selfselection screening device to identify and allocate tenants according to their otherwise unobservable abilities (Braverman and Guasch. 1984). Most of the above-mentioned authors are concerned with tenancy and credit markets when they refer to interlocking factor markets although labor and product markets are occasionally mentioned.’ The debate on interlocking markets was triggered off by the celebrated paper of Bhaduri (1973) in which he argued that the landlords in a semi-feudal agrarian economy. whose income consisted of both land rent and interest on consumption loans granted to the tenants, would be discouraged from adopting any technological improvements so long as the gain in their income from such improvements was offset by a loss in usury income due to a reduction or elimination of consumption loans required by the tenants. They were also discouraged from introducing technological innovations because the reduction in the tenants’ need for consumption loans weakened their economic and political power which were based to a large extent on their ability to keep the tenants in perpetual indebtedness. Bhaduri’s seminal paper, which was an elegant attempt to explore how an outdated mode of production could become an effective barrier to the

release of the productive forces of the society. left a number of questions unanswered. It uas argued by a number of authors (Ghose and Saith. 1976; Newbery, 1975; Srinivasan. 1979: Bardhan. 19%); Braverman and Stiplitz. 1YS2) that if the landlords did have such oppressive powers as Bhaduri had attributed to them. then it was not at all clear why they could not usurp all the benefits of techological improvements by way of increased interest rate and cropshare. It was also questioned in what sense cropsharing with interlocking markets had to be regarded as semifeudal (Bardhan, 1980). and not a manifestation of monopolistic power of the lenders in a fragmented credit market. While these criticisms have their merits, what is noteworthy is that most subsequent authors, including some of the critics actually followed Bhaduri’s lead themselves, when modeling interlinked tenancy and credit markets. It will be useful to delineate some of the common features of most of the models of interlinkages including that of Bhaduri. All these models assert that the tenants are landless workers. It is sometimes also implied that they are much poorer than their landlords and live at the margin of subsistence. The landlords are assumed to have monopoly power over their tenants which enables them to prevent the tenants from renting land from other landlords. The tenants are perpetually in need of consumption loan which is supplied to them esclusively by their respective landlords at an interest rate determined by them.’ The landlords are also assumed to have the power to reduce the tenants utility level through “reservation” to their various means. In their criticism of Bhaduri, Newbery (1975) and Ghose and Saith (1976) argued that in a landscarce economy the tenants could be reduced to their subsistence level by suitably altering the rental share and other terms of the lease contract so that usury as a means of exploitation was redundant.J It may be pointed out here that Bhaduri did recognize this possibility (Bhaduri. 1973, p. 136). but did not analyze this as he presumably did not consider rental share as a variable. As will be seen later, subsequent authors recognized that when the rental share could not be changed because of legal or social sanctions the landlords resorted to otherwise redundant interlinking transactions in various markets to achieve what they could have done simply by varying the contractual share. The possibility that variations in plot size alone could maximize the gains of the landlords was analyzed by Braverman and Srinivasan (1981). They showed that as long as the landlords were free to vary the size of the plot given to a tenant

TENANCY

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and there was an infinite supply of potential tenants at a reservation utility level (utility that could be obtained by a tenant by working as a wage laborer), a tenant’s utility from cropsharing in equilibrium would be no more than the reservation utility regardless of the presence or absence of interlinkages or other instruments of control by the landlord. This followed from the assumption that the tenant was prevented from renting land from any other landlord or from mixing contracts so that he had to increase his effort when plot size was reduced in order to eke out a subsistence income. From this they derived the result that any policies other than land reform would not affect the welfare of the tenants, and any subsidization of the tenants’ credit would result in subsidizing the landlords. However, a reader cannot help feeling uneasy about their analysis because their propositions seem to be restatements of their axioms. Thus. in the same page (p. 290) they stated the axiom that there was an infitziresupply of identical share tenants at a reservation utility, and also presented the proposition that in equilibrium. a tenant’s utility obtained through cropsharing would be the same as the reservation utility. It IS intuitively quite obvious that when there is an infinite supply of tenants at a reservation utility, they can have no more than the reservation utilitv in the final equilibrium, and any attempt to-improve their welfare, by assumption, must be a failure and the resources spent on such an attempt will either be wasted or benefit the landlords. Nonetheless, the paper is interesting for its insightful results. The authors showed that it was in the interest of the landlord to ensure that the tenants got credit from the cheapest source and in the event the landlord himself was that source, he would offer the tenants tied tenancy-cum-credit contracts. The model also implies that nothing short of a full-scale land reform is likely to affect the tenants’ welfare, which is believed to be true by many. Braverman and Stiglitz (1982) analyzed interlinkages in a world characterized by uncertainty and asymmetrical distribution of information between agents which gave rise to moral hazard problems. They showed that for a given level of expected utility of the tenants, the landlords could increase their own expected utility by simultaneously controlling the credit market. This was so because credit given to the tenants increased income of the landlords through not only interest receipts, but also its effect on the effort of the tenants applied to cropshare land and their choice of techniques. Therefore, they suggested that both competitive and monopoly markets would, in general, be characterized by interlock-

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657

ing markets. In a more recent paper. however, Braverman and Stiglitz (1986) agreed with Bhaduri that the institutional structure of the economy might indeed be an important determinant whether a particular innovation would or would not be adopted. They showed that under some plausible conditions the landlords could and might actually wish to resist innovation which unambiguously increased production. Mitra (1983) argued that interlocked contracts were a response to prohibitive monitoring costs and consequent moral hazard problems. He showed that when landlords were not restricted in their choice of rental contracts, a Paretoefficient equilibrium could not have any cropsharing contracts and will be characterized by wage contracts alone-a result which was earlier established by Jannuzi and Peach (1980) and Bell and Braverman (1980). But when there were moral hazard problems and the utility function of the tenant was intertemporally additive. an interlinked credit-cum-tenancy contract could not be Pareto-dominated by a delinked contract. This had the implication that well-meaning reforms that prohibited interlinking of land lease and credit markets, and granted tenants access to the official credit market at competitive rates could actually reduce the welfare of both tenants and landlords. Unlike most of the works mentioned above, Braverman and Guasch (1984) analyzed the interlinking of tenancy and production credit contracts. They showed that in a world characterized by heterogeneous tenants with some unobservable attributes and numerous landlords with limited supply of land, the landlords could resort to a self-selection screening mechanism by offering interlocking tenancy-cum-credit contracts to identify and allocate tenants according to their abilities. The only possible equilibrium under monopolistic competition was a sorting one where the tenants of a given ability selfselected by choosing a different interlocked contract. More able tenants were offered more credit to buy inputs, but at a lower rate of interest, i.e.. the landlords subsidized the purchase of inputs by more able tenants. In such a world, the equilibrium allocation with no interlocking was always inefficient. In a recent paper Gangopadhyay and Sengupta (1986) challenged the conventional wisdom that it was only the landlords who stood to gain from and, therefore, had an incentive to-interlink transactions in various markets. They argued that the tenants, too, might have an incentive to profitably interlink transactions in land and credit markets. Hence they constructed a more general model of interlinking where both the tenants and

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the landlords were allowed to make their voluntary choices subject to the constraints they faced. It was shown that when the tenants were risk averse but the landlords were risk neutral. the latter would subsidize production loans but charge the market rate for any consumption loans given to their tenants. Only when the landlords could not operate in the input market they would, as a second best device, subsidize consumption loans. It was also shown that under certain conditions the rate charged by the landlords on production loans could be actually nonpositive. From these results they concluded that market interlinkages, contrary to Bhaduri’s claim (1973. 1977). might not be a very plausible hypothesis for explaining usurious interest rates.

3. THE EMPTY BOX OF INTERLOCKING MARKETS: EMPIRICAL EVIDENCE Do these models of interlocking markets under cropshare tenancy have any empirical relevance in the specific context of a peasant economy? While theoretical literature abounds, empirical findings on the nature of transactions are hard to come by. Two noted papers on the subject are Bardhan and Rudra (1980)s and Jodha (1984) which investigate the existence of interlinkages in tenancy contractual arrangements in some parts of India. The findings presented in these papers suggest that although it is not uncommon for tenancy and credit markets to be interlocked,’ interlinkages between tenancy and other markets are very rare. An attempt to test the relevance of models of interlocking markets with respect to the agriculture of Bangladesh is made in this section. Bangladesh is one of the economically least developed countries of the world with a relatively large agricultural sector accounting for about one-half of the GNP and employing more than three-fifths of the labor force of the country. Its agriculture is still backward and yield rates are very low. Modern technolo gy has not yet been adopted sufficiently widely. The multitude of the rural population is desperately poor and live on the margin of subsistence. The distribution of landholdings is skewed, and about twofifths of the rural population is landless. Selfcultivation with family and/or hired labor is the dominant tenurial form. About one-fifth of the total arable land is cultivated under other tenurial forms of which cropshare tenancy alone accounts for nearly 93% of the leased land (Jannuzi and Peach, 1980).* Bangladesh agriculture would thus appear to be an ideal case where the landlords could interlink transactions in dif-

ferent markets to extract maximum possible surplus from their tenants. The findings presented in this paper have been culled out from the data of a survey of two randomly selected villages in each of the districts of Mymensingh, Comilla and Rajshahi in Bangladesh. The survey was conducted by. a research team of the Department of Economics. University of Dhaka during May-June 19S2. Since the study was concerned primarily with cropshare tenancy, 50 households were randomly selected based on stratified sampling procedure from that part of each village population which participates in the land lease market. Thus a total of 300 households were selected for interview. The households which are involved in the land lease market may be divided into four broad categories in terms of land ownership and type of tenancy transaction. These are: Pure landlords rent out the entire land they own and do not actively engage in cultivation. Cultivator landlords rent out a part of their own land and cultivate the remaining part with the help of family and/or hired labor. Owner tenants own some land and rent in additional land for cultivation. Pure tenants do not own any land and rent in the entire land they cultivate. The first two groups are often loosely labeled “landlords” while the last two groups are frequently called “tenants.” It is possible that some households may both rent in and rent out land. This may happen because some households may rent out any parcel of their land which is at an inconvenient distance from the rest of their land and may rent in land which is nearer. The existence of such households causes an identification problem. It was arbitrarily decided that such a household would be categorized as a cultivator landlord if it rented out at least twice as much land as it rented in, and an owner tenant if it rented in more than twice the amount of land it rented out. Even after this auxiliary classification scheme five households could not be identified with any of the categories. These households are excluded from the analysis below. The distribution of the households is shown in Table 1. It should be pointed out that the distribution of households in the sample does not in any way indicate their relative distribution either in the sample villages or in the country as a whole. The purpose of the survey required that a sufficiently large number of observations should be drawn from each category of households such that each could be put to independent statistical tests. A stratified sampling procedure was therefore, adopted for the survey.

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Such a procedure ensures the randomness of the observations of each category. In order that the models of interlocking markets be applicable to the specific empirical context of Bangladesh agriculture. the assumptions which underlie the structures of these models should roughly describe the general characteristics of the economy. As will be seen shortly, almost none of these assumptions seems to hold for the sample of the survey. The first question that may be asked is whether the landlords are very much richer than the tenants as implied by some of the interlinkage models.’ As will be clear from Table 1, the pure tenants are undoubtedly the poorest group of households in all districts, their annual net income being substantially lower than that of the other groups. The cultivator landlords have the highest net income in Mymensingh and Comilla, but their income is lower than that of the owner tenants in Rajshahi. All three cultivating groups in Rajshahi have very low incomes primarily because of loss suffered in cultivation. The net crop incomes of both the cultivator landlords and the pure tenants were actually negative while the owner tenants earned only a small income from cultivation. The pure landlords.“’ contrary to the general belief, are not very well-off in any district. In fact they are less well-off than the owner tenants in Mymensingh and Rajshahi, and only marginally better off than the owner tenants in Comilla. On the whole, the cultivator landlords have a much higher net income than the other groups. Their income is 59% higher than that of the owner tenants who are the second most welloff group. They are followed closely by the pure landlords. The net income of the pure tenants, who are the poorest group of farmers, is only 37% of that of the cultivator landlords and 59% of that of the owner tenants. The relatively high net income of the cultivator landlords can not, however, be taken as an unambiguous indication of their relative affluence. This is due to the fact that their families are also larger than that of the other groups. In terms of per capifa income cultivator landlords are only marginally better off than the owner tenants in Mymensingh and Comilla, while in Rajshahi they are actually much worse off than the owner tenants. The pure landlords have a higher per capita income than any other groups in Comilla and Rajshahi. The per capita income of the pure tenants in Mymensingh and Comilla is lower than that of all other groups, but it is higher than that of the cultivator landlords in Rajshahi. On the whole the pure landlords have the highest per capita income due to their small family size. They are followed very closely by the cultivator land-

lords. The owner tenants have a per cnpircz income which is about four-fifths of that of the pure landlords, while the per crzpira income of the pure tenants is only 65% of that of the pure landlords. The income figures presented above do not lend much credence to the general belief of a very rich and homogeneous landlord class wielding monopoly power in the rural areas of Bangladesh. Although the landlords as a class have a higher income than the tenants, the degree of income inequality is not so severe as to suggest that the landlords can have any great control over the tenants.t’ In absolute terms. all groups of households are poor. some being poorer than the others. This clearly indicates the problems of associating the landlords as a whole with a rich and surplus-consuming oppressive class in the rural areas as has been done by some people. One essential aspect of many of the interlinkage models is that the tenants are wholly (or at least crucially) dependent on their landlords for their livelihood, because without such a dependence the landlords cannot be expected to have much power or control over the tenants. But as Table 1 shows. this is not true of the sample. The tenants have substantial noncrop income for which they presumably do not depend on their landlords. The proportion of the tenants’ income accruing from non-crop sources is very high. In fact, the pure tenants have hardly any reliance on crop income. Cultivation would appear to be a minor subsidiary occupation for most of them.” Because of losses suffered in cultivation, the net crop income of the pure tenants in Rajshahi is actually negative, while net crop income of the pure tenants in Comilla is only 9% of their total net income. The net crop income is a substantial proportion (21%) of the total income of the pure tenants in Mymensingh only. The owner tenants in general have a greater stake in cultivation. Thirty-four percent of the total income of the owner tenants in Rajshahi, 36% in Comilla and 53% in Mymensingh were contributed by their income earned in cultivation of their farms. Only a fraction of this crop income is contributed by rented land. Since the average rented area per farm is only a small part of the total operational area of the farmI this fraction (of income contributed by rented land) is evidently fairly small. We may, therefore, conclude that the dependence of the tenants on their landlords for their livelihood is not substantial, which is contrary to the implication of the aforementioned models. Another assumption built into the models of interlinkages is that landlords have the power to restrict access of their tenants to other landlords.

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By preventing tenants from renting land from others, landlords can enforce desired intensity of cultivation on cropshare land and also use the tenants’ need for credit to their advantage. But the tenants of the sample frequently rented land from more than one landlord.” The average number of share contracts (i.e., landlords) per tenant stood at 1.62. The tenants apparently were not under any obligation not to rent land from more than one landlord. This might seem to suggest that the tenants would rent land until its marginal product was driven to zero. However, freedom to rent land from as many landlords as the tenant chooses does not mean that he can or does actually rent land extensively without any regard to productivity. The threat of termination of lease in the event of poor performance acts as a powerful restraint on the leasing policy of the tenant.ls Furthermore, although the landlords do not or can not prevent the tenant from renting land from several landlords, they usually restrict the supply of their land in order to ensure that no tenant has more land than what he can cultivate satisfactorily with his endowments. His endowments (especially labor and draft power) set the upper limit to the amount of land that he can rent. Such a rationing process does not necessarily imply coercion on the part of the landlords to restrict the mobility of their tenants.16 The data presented in Table 1 reveal an important development in the agriculture of Bangladesh. A large proportion of the households are dependent on off-farm activities for a substantial part of their earnings and this dependence seems to be greater for small and tenant households than for large and non-tenant farmers. This should not be very surprising in view of the high density of population which makes the availability of land per farm very low. Three-tenths of the farms in Bangledesh have an operational area of less than 1.5 acres of land, while another twotenths have an area between 1.5 and 2.5 acres (Agricultural Census, 1977). For these households substantial off-farm employment is essential to eke out even a subsistence income. That the farmers in Bangladesh engage in off-farm activities to augment their incomes has long been suspected, but its extent and importance have not been fully appreciated until very recently. Khuda (1985) has reported that one-half of the total income of his sample households (in a village in Comilla) is earned from off-farm employment. Bhaduri, Rahman and Arn (1986) have found that more than three-fifths of their sample households (in four villages in Noakhali) with stable landholdings earned more than four-fifths of their total income in off-farm employment while another three-tenths earned between two-fifths

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to four-fifths of their income from such employment. While these figures are not directly comparable to the findings in Table 1 they are nonetheless strongly suggestive of the actual extent of off-farm earnings of the farm households. The data presented in Table 1 do not seem to be at variance with the findings of these studies and may be regarded with some confidence. It would, therefore, appear that a great number of farm households in Bangladesh do indeed earn a major part of their income from off-farm sources. ” It does not seem likely that the agrarian structure suggested by the evidence presented above is one where the landlords could unilaterally interlock transactions in various markets to extract maximum surplus from their tenants. The evidence shows that some of the crucial assumptions, without which the interlinkage models can not be sustained, are not tenable for the sample. It is unlikely that the predictions of these models can either be true. It is shown below that most of the predictions are actually not consistent with the findings. The terms and conditions of share contracts evolve over time shaped by complex socio-political and economic relationships which may put the tenant in a dependent and subordinate relationship ris-ci-vis their landlords. This may provide an opportunity to the latter to exploit the situation to their advantage. This has led some authors (Bhaduri, 1973; Ghose and Saith, 1976) to assert that cropsharing is essentially a semifeudal mode of production. But the dependence of the tenants on their landlords need not be an outcome of only a semi-feudal relationship. It can also occur in a capitalist or other types of economy. What distinguishes feudalism from other production relations, as pointed out by Bardhan and Rudra. is ‘*. . . the appropriation of surplus in the form of unpaid labour services and other obligatory payments by primarily rentier landlords through extra-economic coercion, that is. through various social and politico-legal compulsions” (p. 292). In order to be a semi-feudal relationship cropshare tenancy must exhibit these characteristics. But the sample reveals a different picture. Only 13% of the landlords in Mymensingh, 42% in Comilla and 17% in Rajshahi conceded that they received compulsory free service (other than agricultural labor) from all or some of their tenants while 9% of the tenants in Mymensingh, 52% in Comilla and 5% in Rajshahi said that they rendered some free services to their landlords (Table Z).‘” Thus rendering compulsory free service to the landlords is quite uncommon in the districts other than Comilla which interestingly has the lowest in-

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2. Interlinking

DEVELOPMENT of land lease and labor murkets Mymensinyh

1. a. No tenant renders free service Some fenanfs render free service All tenants render free service Total b.

No landlord extracts free service Some landlords extract free service All landlords extract free service Total

2. a. No tenant renders free agriculture labor Some tenants render free agriculture labor All tenants render free agricultural labor Total b. No landlord extracts free agricultural labor Some landlords extract free agricultural labor All landlords extract free agricultural labor Total

Comilla

Rajshahi

Total

27

I8

20

65

2

I1

2

1.5

2 31

2 31

2 24

6 86

62

32

70

164

5

21

2

28

1 68

14 67

2 71

17 209

26

30

24

80

-

4

3

1

2 31

31

2-I

2 86

66

62

71

199

2

3

1

6

68

2 67

2 7-l

4 209

28 2 1 31

26 3 2 31

24 24

78 5 3 86

-

3. Are the tenants paid market wage for rendering agricultural labor on retained land? Always Sometimes

Never Total

cidence of cropshare tenancy in the country. The incidence of unpaid agricultural labor services is even less. Only 16% of the sample landlords in Mymensingh, 3% in Comilla and none in Rajshahi said that all or some of their tenants rendered unpaid agricultural labor services on their land while only 3% of the tenants in Mymensingh, 7% in Comilla and 4% in Rajshahi reported rendering such unpaid services to their landlords. Furthermore, what is very remarkable is that the landlords can not be regarded as a pri-

marily

rentier class because land rent is not the only or even a major iource of their income. This is shown in Table 1. Rental income is only about one-fourth of the net income of the pure landlords in each of the three districts and barely one-seventh of the net income of the cultivator landlords in Mymensingh and Comilla, and about one-half in Rajshahi. On the whole. less than one-sixth of the total income of the cultivator landlords is contributed by land rent. All these findings are fundamentally different from the

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general features of feudalism as it existed in Europe, Japan or even Bangladesh (and India) under the British Raj. It is not possible to determine directly from the data whether there were any interlinkages between land lease and labor markets in the sense that the landlords required, as part of the share contracts, that the tenants work on their land. It is quite possible that the landlords stipulated such a requirement and paid them market wage for their labor. Given an uncertain labor market, it is conceivable that such a requirement is not only beneficial to the landlords, but also to the tenants who may welcome such an interlinkage. However, an upper limit of the possible incidence of such an interlinkage may be established. The tenancy market in Bangladesh is dominated almost exclusively by the owner tenants who lease in 98% of the total rented land of the country. Thus, any significant interlinkage in the land and labor markets must involve the owner tenants almost exclusively. However, only onefifth of the owner tenants in the sample areas occasionally worked as wage laborers (see Taslim, 1987. Appendix A for details). This implies that at most one-fifth of the owner tenants might have worked as wage laborers under interlinked contracts. The overwhelming majority of the owner tenants never worked as wage laborers and hence the question of being underpaid for their labor does not arise. The responses of the landlords regarding the possibility of payment of market wage if the tenants worked on their farms are contained in section 2 of Table 2. Only 10% of the landlords in Mymensingh and 16% in Comilla said that they either did not pay market wage to their tenants if they had employed them, or would not possibly pay market wage if they were to employ them, while all Rajshahi landlords said that they did not or would not discriminate against their tenants. Thus it would appear that there is no deliberate or coercive interlinking of land lease and labor markets. The hypothesis regarding the interlocking of land lease and product markets can be summarily dismissed. There was not even one instance where the tenants sold their products to their landlords, let alone on unequal terms. Products were usually sold in the village or nearby markets. The landlords did not (or could not) restrict the tenants from selling their products in the marketplace. The responses of both the landlords and the tenants were identical in this respect. One of the major factors that presumably enables the landlords to maintain their exploitative dominance over the tenants is the latter’s indebtedness to the former. The landlords are

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thought to have the incentive to supply credit to their poor tenants as they partake in the outcome (i.e., share of the increased production). and are also in a better position than anyone else to enforce payments at the time of harvest. If these models of interlocking land and credit markets were applicable in a specific empirical context, one would expect to find a large proportion of the tenants borrowing from their landlords. But in the sample only seven tenants (about 3%) received credits from their landlords (see Table 3a). The largest source of credit was different credit institutions from which 89 tenants (-13%) borrowed money. ” The next largest source of credit was friends and relatives who provided loans to 78 tenants (38%). followed by neighbors who supplied loans to 64 tenants (3296). The landlords were the most insignificant source of credit not only in terms of the number of tenants who borrowed from them. but also in terms of the amounts borrowed. Four of the seven tenants who took credit from their landlords used it for consumption purposes. while two used it to defray production costs (Table 3b). It is curious that one tenant received credit from his landlords even to purchase land - a phenomenon which can hardly be explained by, any of the interlinkage models. There were no Interest charges on credits taken by five of the tenants. while one tenant paid an usurious interest charge of 100% and the other paid an even higher rate of 200% per annum (Table 3~). It is interesting to note that both tenants who paid interest on loans

Table

Institutional sources

Friends and relatives

89

Table

Nil 5

of credit taken by wmmts

Neighbors

78

Local traders and monrylenders

65

Production 2

7

To purchase 1

200% 1

landlords

land

3c. Inlerest charges on credit from 100% 1

Landlords

26

3b. Purpose of credil taken from

Consumption 4

Table

3a. Source

Total 7

landlords Total 7

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DEVELOPMENT

were very small farmers operating less than one acre of land. Three of the remainmg tenants had to offer their own land as collateral for the loans although they were not required to pay any interest. It is abundantly clear from above that the landlords are not only an insignificant source of credit for the tenants. but they mostly do not charge any interest on their credits. All the results presented in this section are so obvious that it was not thought necessary to perform any statistical tests to establish robustness.

4. CONCLUSION It may be mentioned that the fact that the landlords seldom provide credit to their tenants as such is not a contradiction of some of the models discussed earlier including Braverman and Srinivasan (1981) and Braverman and Stiglitz (1982). Braverman and Srinivasan showed that if the opportunity cost of credit to the landlords were dearer than that from other sources then the landlords would not supply any credit to them. Given that the landlords were not very much richer than the tenants, it is quite conceivable that the opportunity cost of credit of the landlords could be higher than that from other in the Braverman-Stiglitz sources. Similarly,

model, the landlords would supply credit to the tenants only if it increased their effort on cropshare land, which in turn implies that the marginal disutility of labor must be non-decreasing in consumption. Not only that the same result of interlocking markets could be deduced from models very different from the above. but also these propositions follow from assumptions (without which these models are not tenable) which have been shown not to hold for the sample. Therefore, these models cannot possibly be invoked to explain the pattern of transactions of the households in the sample. If the sample is representative of the land lease market in Bangladesh, and there is no reason to believe otherwise, then it is safe to conclude that land, labor. product and credit markets are not interlocked to any significant extent in the present day Bangladesh. The landlords, too, do not resemble the rich, oppressive and rentier landlords of Bhaduri. Market forces seem to have penetrated quite pervasively in rural Bangladesh and the country seems to have moved out of the phase of history when, by interlocking transactions in various markets, the landlords could tighten their exploitative grip over their tenants. Therefore, any explanation of agrarian underdevelopment by way of the landlords’ exploitative power over their tenants is misplaced; the reason must be sought elsewhere.

NOTES 1. Almost all the papers mentioned below commence their discourse with such an assertion, but none provides any evidence on the issue. 2. See, for example, and Stiglitz (1982).

Bardhan

3. Some authors allow sources. See. for example. (1981).

(1980)

and Braverman

for borrowing from other Braverman and Srinivasan

4. Ghose and Saith actually reached a conclusion oonosite to that of Bhaduri. They showed that the greater the dominance of the landlords over their tenants, the greater the likelihood that they would adopt technological improvements. Srinivasan (1979) also argued that under Bhaduri’s assumptions the landlords had an incentive in adopting yield increasing innovations. Pant (1980). too, reached a similar conclusion. 5.

Also

see Bardhan

6.

To be accurate,

and Rudra

(1978:

1983).

what these papers show is the ex-

tent of credit transactions between landlords and tenants. Their findings do not imply that the contracts for land and credit were drawn jointly or deliberately. In an informal and non-professional credit market. transactions will usually take place between people who know each other well. Credit transactions will, therefore, usually take place between friends. relatives and neighbors. Given that the landlords usually rent out land only to those whom they know well. such transactions can also occur between them. Furthermore, only those people can offer credit to others who have a surplus to lend out from. Since the landlords are in general better off than other groups of households, they are likely to constitute a large proportion of the set of feasible or prospective creditors of a tenant. Thus even if the tenants choose their creditors randomly from the feasible set, a large proportion may be found to borrow from their landlords. Whether such transactions can be regarded as an evidence of interlocking markets is open to question. It may be interesting to note that their findings that land and labor or product markets tend to be interlinked much less frequently than land and credit markets may also be interpreted as an indication of the fact that the landlords of a tenant are usually only a

TENANCY

AND

INTERLOCKING

small or even negligible (particularly in the case of product) proportion of prospective employers of his labor or buyers of his product. 7. Only 13% of the gross cropped area in Bangladesh is irrigated (1981-82). much of it by traditional methods. More than three-fifths of the gross cropped area is devoted to (low yielding) local varieties of rice and wheat while only about one-fifth is under HYV cultivation. The application of chemical fertilizer is also very low: only 26 kilogram per gross acre. As a result the yield rates of different crops in Bangladesh are one of the lowest in the world. 8. The households in the sample below executed a total of 54.5 tenancy contracts of which 512 (i.e.. 94%) were in the nature of cropshare contracts. Cropshare tenancy is thus the dominant rental arrangement also in this sample. 9. Another important aspect of these models is the assertion that the tenants are landless. This can be rejected outright. Less than 2% of the total rented land is leased out to landless tenants in Bangladesh (Agriculture Census, 1977). IO. It is possible that the pure landlords of the sample are not fully representative. A certain fraction of the pure landlords are known to be absentee. They could not be included in the scope of the sample because of the obvious reason that the research investigators could interview only those who were residing in the villages. There are no reliable estimates of the true extent of absenteeism in rural Bangladesh. Whatever fragmentary evidence exists, (e.g., Hossain, 1978; also see Taslim, 1987, Appendix A) suggests that although the absentee landlords are not a major force in the land lease market, it would be inappropriate to assume their influence as marginal. However, their exclusion from the sample is not of much consequence for the issues at hand. Evidence presented in this paper on most of the issues has been derived from the responses of both the landlords and the tenants. Any significant difference in the behavior of resident and absentee landlords can bias only the evidence gathered from the responses of the landlords. But the evidence on the same issue gathered from the tenants is not subject to this bias. As will be seen later. the responses of both landlords and tenants are almost the same suggesting strongly that there is no significant difference between resident and absentee landlords regarding these issues.

665

MARKETS

11. This does not deny the existence of some very large or rich landlords who may indeed have a very oppressive control over their tenants. All that is asserted is that such landlords are not a common feature of rural Bangladesh. 12. This is not surprising in view of the general reluctance of landlords to rent out land to pure tenants. The average operational holding of this group is only about one acre. It is evident that cultivation could not possibly have provided subsistence for more than one or two months of the year, and hence the greater part of their income must be earned outside the farm. 13. The proportion of rented area per farm is 0.40 in Mymensingh, 0.42 in Comilla and only 0.33 in Rajshahi. 14. Nearly one-half of rented land from two or and Bardhan and Rudra ings for India and Nabi 15. These arguments Chap. 3.

the tenants of the sample more landlords. Bell (1977) (1980) reported similar find(1986) for Pakistan.

are formalized

in Taslim (1987).

16. Also see Bliss and Stern (1982) for a discussion on rationing of rental land. 17. Such findings are by no means peculiar to Bangladesh only. Recent studies by Priebprom (1982) and Shand (1985) have found similar tendencv in Thailand and Malaysia, too. 18. If a landlord rents out land to a single tenant and if this tenant renders free service to him then his response has been recorded in the row “All tenants render free service.” If he has more than one tenant and one or more, but not all, of them render free service then his response is entered in the row “Some tenants render free service.” Other entries in Table 2 have similar interpretations. 19. The dominance of institutional sources in the rural credit market is in part a reflection of the success achieved by the government rural credit programs. In February 1977: the government commissioned a massive one billion taka Special Agricultural Credit Programme to improve credit facilities for small and marginal farms.

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