Wednesday, March 17, 2010

Why Japanese farms are so small

Why are Japanese farms so small and so inefficient/ As usual under such circumstances, this is because they are protected through subsidies and zoning laws. But why? No matter what the country, agriculture enjoys protection. Some reasons, depending on the country, may include resistance to change, preservation of the landscape, preservation of traditions and securing wartime food for the country. All this can explain why the agricultural sector is subsidized and then inefficient, but that does not explain why Japanese farms are small. They could still merge.

Yoshihisa Godo finds an explanation from political economy. Japanese farmers can make more money from manipulating farmland regulation than from farming itself. In other words, they are extracting rents from holding a regulated asset. For example, as a land-owner, you get money if you preserve its agricultural purpose, and the more prone to conversion to other uses the location is, the more you get. That explains why you would find rice paddies in the middle of dense cities. But when an opportunity arises, farmers convince ("manipulate") authorities to convert the classification of the land to cash in on its market value.

Godo links this to a misunderstanding of democracy, in that people only care for themselves and do not see the consequences for the others. While it may be true that people in Japan a century ago may have been less selfish, the current problem is one of deficient institutions, not deficient people. That institutions cannot be changed may very well be an issue of lobbying and rent-seeking, but you cannot blame it on citizen having little regard on the duties in participatory democracy. Godo's main point is that people complain when a zoning change hurts them, and then exploit other zoning changes for their own gain. He also complains that those hurt ask for compensation. Yet, good economics would precisely ask for such compensation, a very Coasian argument. It would also ask for those who gain to pay for such privilege. This is where Japan is lacking, and once this is implemented, land would be used much more efficiently. Making this happen could very well be a political problem, but it has nothing to do with an implied lack of servitude of the average voter.

PS: I hate it when a paper starts on page 9.

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