As usual on Fridays, from Raj Nallari and Breda Griffith's lecture notes.

Land Inequality and Education

Empirical work on the relationship between land inequality and education focuses on land inequality and the public provision of education.  Mariscal and Sokoloff (2000) in extending the work of Engerman and Sokoloff (1997, 2000) find a negative relationship between the public provision of education and land inequality. Their hypothesis, reported in Erikson and Vollrath (2004) is “that greater land inequality creates collective action problems within the political units responsible for education funding” (p. 5). Similarly, Galor, Moav and Vollrath (2003) examine the incentives of landowners in providing education and predict based on their findings that the more unequal the land distribution the lower the provision of education. The authors suggest that landowners are reluctant to fund education because their view is that higher taxes outweigh the benefits of education, in particular in an agricultural setting. Deininger and Squire (1998) find a negative relationship between levels of education attained and land inequality that may be due to the fact that there was little or no public provision of education, thus making it impossible to increase levels of educational attainment.

Erikson and Vollrath (2004) test the hypothesis that the public provision of education is limited by land inequality. The education variable is measured by the expenditure on education as a proportion of GDP—the authors feel that this captures the commitment to education in a country and is therefore superior to school enrollment rates, although their findings are robust for both variables. Over the 1965 to 1979 period, Erikson and Vollrath (2004) find that higher land inequality across the agricultural population is associated with lower spending on education, but only for the landless population. The negative relationship does not hold for the landholding population.

Land Inequality and Financial Development

The effects of inequality in physical assets such as land can be transmitted through financial markets. For example, access to credit is conditional on ownership of assets and in a developing economy context, land is the most usual asset owned. If investment does not take place because an individual or household is constrained through lack of assets, then the distribution of assets as well as average income will determine how many people are able to undertake investment in, for example, physical and human capital. In societies where the distribution of land is unequal, fewer people will be able to take up investment opportunities, thus leading to lower stocks of human and physical capital and lower levels of economic growth and poverty reduction in the long run.
The literature on land inequality and the financial sector is well subscribed and a broad consensus suggests that land inequality hampers financial development. The literature suggests:

• land inequality results from and/or persists because of poor financial development;
• land inequality implies fewer potential users of financial sector products (credit, deposits, insurance, and so on);
• where rural elites prevail, government may be the main provider of credit, thus retarding the development of the (private) financial sector
• The absence of a properly functioning financial sector with markets for risk and credit contributes to the concentration of land when individuals have no choice but to retain their holdings in the face of external price shocks.  Furthermore, as noted by Erikson and Vollrath (2004) farm workers may have no incentive to change the status quo of land concentration given that production risks are borne by the landowner.  Also in a society where land is concentrated among a minority landholding class, there are few incentives to provide financial sector products given low effective demand. 
  

Next Friday: The role for Government