Guiding Principles:
Land Tenure in Development Cooperation

Orientierungsrahmen:
Bodenrecht und Bodenordnung

Deutsche Gesellschaft
für Technische Zusammenarbeit
Abt. 45 / Div. 45

Capital formation in agriculture and in rural areas is important for its long-term effects on production and its contribution to the economy on the macro level. The existing land tenure system decisively influences the type and extent of the capital formation.

Compared to non-monetary capital formation, the monetary capital formation plays a smaller role. Large farms and their owners usually pay little tax (legal or illegal), so they have a relatively high amount that they can voluntarily use to build up savings and capital. Although small farms are often exempt from paying taxes, their potential for monetary capital formation is considerably lower.

Non-monetary capital formation is of key importance. It occurs in the form of labor input for the improvement of the production and living basis. Often this occurs in small increments, but over the years they sum up to something considerable in many households. Today's cultivated areas were created in this way (terraces, irrigation channels and paths). However, families with large farms also make contributions for prestigious reasons or for economic interests (access roads, wells, repairs to the temple, etc.).

Small farms build up capital through labor input (clearing or planting trees, clearing stones from the fields, erecting fences and increasing livestock herds instead of consuming them). An externality problem is usually not created since the benefit of these efforts falls for the most part to the family that made the effort. On the village level, however, it is more difficult as only a few projects interest all inhabitants equally. This is also dependent upon how strongly communal property rights in resources and community spirit still exist.

When changes are made in the agrarian structure with land being distributed to smallholders, the organization of capital formation must usually be taken over by the government in the transition phase as large landholders (the losers of the reform) lose interest in making investments. Since governments are less in the position to do this, the chances for land reforms decline.